A Roth IRA is a retirement savings account where you contribute money that has already been taxed
A Roth IRA is an individual retirement account that lets you set aside money for retirement using after-tax dollars. That means you pay income tax on the money before you put it in the account, not when you take it out later. The money inside grows over time through investments you choose — stocks, bonds, mutual funds — and when you withdraw it in retirement, you owe no federal income tax on those earnings.
The account is named after Senator William Roth, who sponsored the legislation that created it in 1997. It is one of two main types of individual retirement accounts available to working people; the other is a traditional IRA, which works in the opposite way — you deduct contributions from your taxes now and pay tax on withdrawals later.
You do not need an employer to open a Roth IRA. You can open one at a bank, brokerage firm, or credit union on your own, as long as you have earned income from a job or self-employment during the year you contribute.
Key Takeaways
- You contribute after-tax money to a Roth IRA, meaning you pay income tax on it before depositing it, and pay no tax on withdrawals in retirement.
- The money you contribute can be withdrawn at any time without penalty, but earnings can only be withdrawn tax-free after age 59½ and after the account has been open for at least five years.
- Income limits apply — if you earn above a certain threshold, you cannot contribute the full amount or may not be able to contribute at all, and these limits change each year.
- You can contribute up to a set dollar amount per year (the limit changes annually), and you do not have to take mandatory withdrawals at any age, unlike traditional IRAs.
- You can open a Roth IRA at any bank, brokerage, or credit union without needing employer sponsorship.
How much you can contribute each year
The IRS sets an annual contribution limit that changes most years. For 2024, the limit is $7,000 if you are under age 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). For 2025, the limit is $7,000 under age 50 and $8,000 at 50 and older. These amounts are set by law and adjusted for inflation, so they may change again in future years.
You can contribute less than the limit — there is no minimum. You can also contribute to a Roth IRA and a traditional IRA in the same year, but your combined contributions to both accounts cannot exceed the annual limit.
You must have earned income to contribute. Earned income means wages from a job, net self-employment income, or taxable alimony. Investment income, Social Security, or pension payments do not count.
Income limits that may reduce or block your contribution
The IRS restricts who can contribute to a Roth IRA based on your modified adjusted gross income (MAGI). If your income is too high, you cannot contribute the full amount, and if it is high enough, you cannot contribute at all. These limits are different for single filers, married filing jointly, and married filing separately.
For 2024, if you are single, the limit begins to phase out at $146,000 MAGI and phases out completely at $161,000. If you are married filing jointly, it begins at $230,000 and phases out completely at $240,000. For 2025, these numbers are $148,000 to $163,000 for single filers and $233,000 to $243,000 for married filing jointly. If your income falls in the phase-out range, you can contribute a reduced amount; if it exceeds the upper limit, you cannot contribute at all that year.
These limits apply only to direct contributions. There is a workaround called a backdoor Roth that allows higher-income people to contribute indirectly through a traditional IRA, though it involves specific steps and tax considerations.
When you can withdraw your money without penalty
You can withdraw the money you contributed (not the earnings) at any time, for any reason, without penalty or tax. This is one major difference from a traditional IRA. If you withdraw earnings before age 59½, you generally owe income tax on those earnings plus a 10 percent penalty — unless an exception applies.
Exceptions to the early withdrawal penalty include: disability, medical expenses that exceed 7.5 percent of your adjusted gross income, health insurance premiums while unemployed, a first-time home purchase (up to $10,000 lifetime), education expenses, and substantially equal periodic payments. Even with an exception, you still owe income tax on the earnings portion.
After age 59½, you can withdraw earnings tax-free as long as the account has been open for at least five years. This five-year rule applies to each Roth IRA separately if you have more than one. The five years is measured from January 1 of the year you made your first contribution to any Roth IRA, not from the date you opened the account.
No required withdrawals during your lifetime
A traditional IRA requires you to start taking withdrawals (called required minimum distributions or RMDs) at age 73, whether you need the money or not. A Roth IRA has no such requirement during your lifetime. You can leave the money in the account to grow as long as you live, and you never have to withdraw it if you do not want to.
This makes a Roth IRA useful for people who do not need the retirement income immediately or who want to leave the account to heirs. Your beneficiaries will inherit the account, though they will have different withdrawal rules than you do.
How the money grows through investments
When you open a Roth IRA, you choose how to invest the money you contribute. The account itself is just a container; the growth depends on what you put inside it. Most people invest in mutual funds, index funds, individual stocks, or bonds through their bank or brokerage.
The earnings — the profit from your investments — grow tax-free inside the account. You do not pay tax each year on dividends or capital gains the way you would in a regular taxable investment account. This tax-free growth is the main advantage of a Roth IRA over saving money in a regular savings account or taxable brokerage account.
If your investments lose value, your account balance goes down, but you cannot deduct that loss from your taxes. You also cannot borrow money from your Roth IRA the way you can from some employer retirement plans.
Roth IRA versus traditional IRA: the main differences
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Tax on contributions | After-tax (no deduction) | Pre-tax (tax deduction) |
| Tax on withdrawals in retirement | Tax-free (if rules met) | Fully taxable |
| Withdrawal of contributions before 59½ | No penalty or tax | 10% penalty plus tax |
| Required withdrawals at age 73 | No | Yes |
| Income limits on contributions | Yes | No (but deduction phases out if covered by workplace plan) |
| Can contribute if over age 73 | Yes (if you have earned income) | No |
The choice between a Roth and a traditional IRA depends on whether you expect to be in a higher or lower tax bracket in retirement, how much you earn now, and whether you want flexibility to withdraw contributions early. Many people use both types of accounts.
Frequently Asked Questions
Can I open a Roth IRA if I am self-employed?
Yes. You need earned income, which includes net self-employment income. You can contribute up to the annual limit or your net self-employment income for the year, whichever is less. Self-employed people can also open a SEP IRA or Solo 401(k), which allow much higher contributions.
What happens to my Roth IRA if I die?
Your beneficiary inherits the account. They can withdraw the money, but the rules depend on whether they are a spouse or non-spouse beneficiary and when you died. A spouse can treat the inherited Roth as their own; a non-spouse generally must withdraw the balance within ten years but can do so tax-free if the account met the five-year rule.
Can I contribute to a Roth IRA and a 401(k) in the same year?
Yes. They are separate accounts with separate contribution limits. Your 401(k) contributions do not count toward your Roth IRA limit. However, high income may prevent you from contributing to a Roth IRA even if you have a 401(k).
What if I made a mistake and contributed too much to my Roth IRA?
You can withdraw the excess contribution and any earnings on it before your tax return deadline (including extensions). If you do not correct it, you owe a 6 percent penalty each year the excess sits in the account. Contact your bank or brokerage for instructions on how to withdraw an excess contribution.
Do I need to report my Roth IRA on my tax return?
You do not report contributions or withdrawals of contributions. You do report conversions from a traditional IRA to a Roth IRA. If you have a large Roth IRA, you may need to report it on certain forms, but most people do not.