A Roth IRA is a retirement savings account where you contribute after-tax money and withdraw it tax-free later

A Roth IRA is an individual retirement account you fund with money you've already paid income tax on. When you withdraw that money in retirement — after age 59½ — you owe no federal income tax on it, and you owe no tax on the earnings it generated either. The account grows tax-free the entire time you own it.

The tradeoff is straightforward: you get no tax deduction when you contribute. A traditional IRA lets you deduct contributions from your taxable income in the year you make them. A Roth doesn't. But if you believe your tax rate will be higher in retirement than it is now, or if you simply want to lock in your current tax rate and grow money untaxed, a Roth can be the better choice.

You open a Roth IRA through a bank, brokerage, credit union, or investment firm — not through your employer, and not through the government. The account itself is just a container. What you put inside it (stocks, bonds, mutual funds, cash) is up to you and your financial situation.

Key Takeaways

  • You fund a Roth IRA with after-tax dollars, meaning you've already paid income tax on the money you contribute.
  • All growth inside the account and all withdrawals after age 59½ are tax-free, as long as the account has been open for at least five years.
  • You can withdraw the money you contributed (not the earnings) at any time without penalty, but earnings withdrawn before 59½ are taxed and penalized unless an exception applies.
  • Income limits determine whether you can contribute to a Roth IRA in a given year; these limits change annually and depend on your filing status.
  • You can contribute to a Roth IRA as long as you have earned income, even after age 70½, unlike traditional IRAs.

How much you can contribute each year

The IRS sets an annual contribution limit. For 2024, you can contribute up to $7,000 to a Roth IRA if you're under age 50. If you're 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution, for a total of $8,000. These limits change periodically; check the IRS website or ask your financial institution what the current year's limit is.

The limit applies to the total you contribute across all IRAs you own — traditional and Roth combined. If you contribute $4,000 to a traditional IRA in the same year, you can only contribute $3,000 to a Roth that year (assuming the $7,000 limit applies to you).

You must have earned income to contribute. Earned income means wages, salary, self-employment income, or other compensation you received for work. Investment income, Social Security, or pension payments don't count.

Income limits that affect your ability to contribute

The IRS restricts who can contribute to a Roth based on your Modified Adjusted Gross Income (MAGI). If your income exceeds a certain threshold, you cannot contribute the full amount — or cannot contribute at all. These thresholds vary by filing status and change each year.

For 2024, if you file as single, the phase-out range begins at $146,000 and ends at $161,000. If you're married filing jointly, it begins at $230,000 and ends at $240,000. If you're married filing separately, the range is $0 to $10,000. These numbers shift upward each year. If your income falls within the phase-out range, you can contribute a reduced amount. If it exceeds the upper limit, you cannot contribute directly to a Roth that year.

If your income is too high to contribute directly, you may still be able to use a "backdoor Roth" strategy — contributing to a traditional IRA and then converting it to a Roth — though this involves tax considerations and is not right for everyone. Speak with a tax professional if this applies to you.

The five-year rule and when you can withdraw

To withdraw earnings tax-free, your Roth IRA must have been open for at least five tax years, and you must be at least 59½ years old. The five-year period starts on January 1 of the year you opened the account, not the date you actually opened it. If you opened a Roth on December 31, 2024, the five-year period ends on December 31, 2029.

You can withdraw the money you contributed (your "basis") at any time, tax-free and penalty-free, regardless of your age or how long the account has been open. Only the earnings are subject to the five-year rule and the age requirement. If you contributed $5,000 and it grew to $6,500, you can withdraw the $5,000 anytime, but the $1,500 in earnings is locked until you meet both conditions.

There are exceptions to the early withdrawal penalty on earnings — for example, if you're a first-time homebuyer (up to $10,000 lifetime), disabled, or facing a may have access to medical expense. These exceptions do not waive the five-year rule; your account still must be five years old.

Roth conversions and when they make sense

A Roth conversion means moving money from a traditional IRA (or a 401(k) in some cases) into a Roth IRA. You pay income tax on the amount you convert in that tax year, but the money then grows tax-free in the Roth, and you owe no tax on withdrawals later.

Conversions are useful if you expect your tax rate to be higher in retirement, if you want to reduce your required minimum distributions (RMDs) in later years, or if you have a year when your income is unusually low. They're also a workaround if your income is too high to contribute directly to a Roth.

The downside is the immediate tax bill. If you convert $50,000 from a traditional IRA, you owe income tax on that $50,000 in the year of conversion. You must have cash outside the IRA to pay the tax; if you use IRA funds to pay it, that counts as a withdrawal and may trigger penalties. A tax professional can help you decide whether a conversion makes sense for your situation.

Required minimum distributions and Roth IRAs

Unlike a traditional IRA, a Roth IRA has no required minimum distributions (RMDs) during your lifetime. You never have to withdraw money from a Roth, even after age 73 (when traditional IRA RMDs begin). This makes a Roth useful if you don't need the money in retirement and want to leave it to heirs.

Your beneficiaries will have to withdraw the money after you die, but they can spread those withdrawals over their own lifetimes in many cases, allowing the money to continue growing tax-free for years. The rules for inherited Roth IRAs changed in 2024, so check current rules if you're planning to leave a Roth to someone.

How a Roth IRA differs from a 401(k)

A 401(k) is an employer-sponsored retirement plan; a Roth IRA is not. You open a Roth on your own, and you control what you invest in. A 401(k) is offered by your employer, and your investment choices are limited to what the plan offers.

A traditional 401(k) works like a traditional IRA — you contribute pre-tax money and pay tax on withdrawals. A Roth 401(k) works like a Roth IRA — you contribute after-tax money and withdraw tax-free. However, Roth 401(k)s have required minimum distributions during your lifetime, whereas Roth IRAs do not. Also, 401(k) contribution limits are much higher than IRA limits ($23,500 for 2024, versus $7,000 for an IRA).

Many people have both: a 401(k) through their employer and an IRA on the side. The contribution limits are separate, so you can max out both in the same year if you have the income and your employer plan allows it.

Frequently Asked Questions

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

Yes. The annual contribution limit applies to your combined contributions across all IRAs you own, but you can split the money between them however you want. If the limit is $7,000, you could contribute $4,000 to a traditional IRA and $3,000 to a Roth, or any other split that totals $7,000 or less.

What happens if I withdraw money from my Roth before age 59½?

You can withdraw your contributions anytime without penalty. If you withdraw earnings before 59½ and the account hasn't been open five years, you owe income tax on the earnings plus a 10% penalty. Exceptions exist for first-time homebuyers, disability, and certain other circumstances, but the five-year rule still applies.

Do I get a tax deduction for Roth IRA contributions?

No. You contribute after-tax money, so there's no deduction. This is the main difference from a traditional IRA. The tradeoff is that your withdrawals in retirement are tax-free.

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

You cannot contribute directly if your income exceeds the phase-out limit for your filing status. A backdoor Roth conversion may be an option, but it involves converting a traditional IRA to a Roth and paying tax on the conversion. Consult a tax professional to see if this strategy works for you.

Can I withdraw my Roth IRA contributions to buy a house?

Yes, you can withdraw your contributions anytime without penalty. However, if you want to withdraw earnings for a first-time home purchase, you can withdraw up to $10,000 lifetime if the account is at least five years old. Earnings withdrawn before five years or beyond $10,000 are taxed and penalized.