A Roth IRA is a retirement savings account where you contribute money after taxes, and withdrawals in retirement are tax-free

A Roth IRA is an individual retirement account that works differently from a traditional IRA or a 401(k). You fund it with money you have already paid income tax on. The account grows over time through investments you choose — stocks, bonds, mutual funds, or other options your provider offers. When you reach retirement age and meet certain conditions, you can withdraw both your contributions and the earnings without owing federal income tax on that money.

The account is named after Senator William Roth, who sponsored the legislation creating it in 1997. It is offered by banks, brokerages, and investment firms. You open one directly with a provider — there is no employer involved, and you do not need permission from anyone to start one.

Key Takeaways

  • You fund a Roth IRA with after-tax dollars, meaning you pay income tax on the money before it goes into the account.
  • Your contributions and earnings grow tax-free inside the account, and you pay no federal tax when you withdraw them in retirement.
  • You can withdraw your contributions (the money you put in) at any time without penalty, but earnings have age and holding-period rules.
  • Income limits determine whether you can contribute the full amount each year, and these limits change annually based on your filing status.
  • You can open a Roth IRA at any age as long as you have earned income from work in that tax year.

How money flows in and out of a Roth IRA

You contribute money to your Roth IRA from your own paycheck or bank account — your employer does not deduct it automatically the way they might with a 401(k). Each year, the IRS sets a contribution limit. For 2024, that limit is $7,000 per year if you are under age 50, and $8,000 if you are 50 or older. These amounts change periodically, so check the current year's limit before you contribute.

Once the money is in the account, you direct it into investments. Your provider gives you a menu of options — mutual funds, individual stocks, bonds, or money market funds. The account itself does not earn interest; the investments you choose do. If your investments gain value, that gain stays in the account and is not taxed. If they lose value, you cannot deduct that loss on your taxes.

When you withdraw money, the rules depend on what you are taking out. You can withdraw your contributions at any time, for any reason, without penalty or tax. Withdrawals of earnings (the investment gains) are tax-free only if you are at least 59½ years old and have held the account for at least five tax years. If you withdraw earnings before meeting both conditions, you owe income tax on the earnings plus a 10 percent penalty.

Income limits that affect how much you can contribute

The IRS limits who can contribute to a Roth IRA based on your modified adjusted gross income (MAGI) — roughly your total income with some adjustments. If your income is above a certain threshold, you cannot contribute the full amount. If it is above a higher threshold, you cannot contribute at all.

These thresholds vary by filing status and change each year. For 2024, a single filer with MAGI over $161,000 cannot contribute to a Roth IRA at all. A married couple filing jointly can contribute if their MAGI is under $240,000. If your income falls between the lower and upper limit, you can contribute a reduced amount. The IRS publishes updated limits every January, so you will need to check the current year before you contribute.

If your income exceeds the limit, you have other options. Some people use a "backdoor Roth" strategy, which involves contributing to a traditional IRA and then converting it to a Roth. This is legal but has tax implications and requires careful record-keeping. A tax professional can advise whether this makes sense for your situation.

The five-year rule and when you can withdraw earnings

The five-year rule is one of the most misunderstood parts of a Roth IRA. It does not mean you have to wait five years to withdraw your contributions — you can take those out anytime. It means you must have held the account for at least five tax years before you can withdraw earnings tax-free.

The five-year period starts on January 1 of the year you open the account, not on the day you open it. So if you open a Roth IRA on December 31, 2024, the five-year period ends on January 1, 2029. If you open one on January 1, 2024, the five-year period ends on January 1, 2029 as well. You only need to satisfy the five-year rule once per person, not once per contribution.

If you withdraw earnings before age 59½ and before the five-year period ends, you owe income tax on the earnings and a 10 percent penalty. There are narrow exceptions — for example, if you are a first-time homebuyer, you can withdraw up to $10,000 in earnings penalty-free (though you still owe tax on them). If you become disabled or are withdrawing funds for medical expenses that exceed 7.5 percent of your adjusted gross income, penalties may not apply.

Roth IRA versus traditional IRA: the tax difference

The main difference between a Roth IRA and a traditional IRA is when you pay taxes. With a traditional IRA, you may deduct your contributions on your tax return in the year you make them, which lowers your taxable income that year. The money grows tax-free inside the account. When you withdraw it in retirement, you pay income tax on the full amount — both your contributions and the earnings.

With a Roth IRA, you do not get a tax deduction when you contribute. You pay tax on that money upfront. But when you withdraw it in retirement, you owe no tax. If you expect to be in a higher tax bracket in retirement, a Roth IRA may save you money. If you expect to be in a lower bracket, a traditional IRA might be better. Your income level also matters — high earners may not be able to contribute to a Roth at all, but there is no income limit for traditional IRA contributions (though deductibility phases out at higher incomes).

Who can open a Roth IRA and what you need to start

You can open a Roth IRA at any age as long as you have earned income from work in that tax year. Earned income means wages, salary, self-employment income, or other compensation you received for work — not investment returns, Social Security, or pension payments. If you are married and one spouse does not work, the working spouse can open a spousal Roth IRA for the non-working spouse, as long as the couple files jointly and the working spouse has enough earned income to cover both contributions.

To open a Roth IRA, you need a Social Security number or Individual Taxpayer Identification Number (ITIN), proof of identity, and proof of address. Most providers let you open an account online. You will need to choose an investment option — your provider can explain the choices, or you can research them on your own. Some people start with a money market fund or target-date fund while they learn more about investing.

There is no monthly fee to maintain a Roth IRA, though some providers charge an annual account fee or require a minimum balance. Shop around — fees and investment options vary widely between providers.

What happens to a Roth IRA after you die

When you pass away, your Roth IRA goes to your beneficiary — whoever you named when you opened the account. Your beneficiary can withdraw your contributions tax-free at any time. They can also withdraw earnings tax-free if the account has been open for at least five tax years and you were at least 59½ when you died.

If the account has not been open five years or you were younger than 59½, your beneficiary owes income tax on the earnings when they withdraw them, though they do not owe the 10 percent penalty. Beneficiaries must begin withdrawing the account within a certain timeframe — the rules changed in 2023 and now require most non-spouse beneficiaries to empty the account within ten years. A spouse who inherits a Roth IRA can treat it as their own or roll it into their own Roth IRA.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can have both. However, your total contributions to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA in one year, you can only contribute $3,000 to a Roth IRA that same year (assuming the $7,000 limit for those under 50).

What if I need money before retirement?

You can withdraw your contributions anytime without penalty or tax. If you need to withdraw earnings before age 59½, you will owe income tax on them and a 10 percent penalty, unless an exception applies (such as disability or first-time homebuyer status). Some people use this flexibility as an emergency fund, though that defeats the retirement savings purpose.

Do I have to take money out of my Roth IRA at a certain age?

No. Unlike traditional IRAs, which require you to start taking withdrawals at age 73, Roth IRAs have no required withdrawal age during your lifetime. You can let the money grow as long as you live and withdraw only what you need.

What if my income is too high to contribute to a Roth IRA?

If your income exceeds the limit, you cannot contribute directly. Some people use a backdoor Roth strategy: contribute to a traditional IRA and convert it to a Roth. This is legal but has tax consequences and requires careful tracking. Consult a tax professional before attempting this.

Can I invest in anything I want inside a Roth IRA?

No. The IRS prohibits certain investments — collectibles, life insurance, and some other assets. Your provider will only offer investments that are allowed. Most Roth IRAs hold stocks, bonds, mutual funds, and exchange-traded funds (ETFs).