A Roth IRA is a retirement savings account where you contribute money that has already been taxed, and then withdraw it tax-free in retirement

The core idea is simple: you put after-tax dollars in now, the money grows over decades, and when you reach retirement age, you take it out without paying taxes on the growth. This is the opposite of a traditional IRA, where you get a tax break when you contribute but pay taxes when you withdraw.

The account itself is held at a bank, brokerage, or credit union. You decide what to invest the money in—usually stocks, bonds, or mutual funds—and those investments grow over time. The IRS sets rules about how much you can contribute each year and when you can withdraw without penalty.

Key Takeaways

  • You contribute money you have already paid income tax on, and withdrawals in retirement are completely tax-free.
  • Your contributions can be withdrawn at any time without penalty, but investment earnings must wait until age 59½ to avoid a 10% penalty.
  • There is no requirement to take money out at any age, unlike traditional IRAs, which means your money can keep growing indefinitely.
  • Income limits determine whether you can contribute the full amount or a reduced amount each year.
  • You can open a Roth IRA at most banks, brokerages, and credit unions, and you control the investments inside it.

How contributions work and what you can put in each year

Each year, the IRS sets a limit on how much you can contribute to a Roth IRA. For 2024, that limit is $7,000 if you are under 50, or $8,000 if you are 50 or older. These limits change periodically, and your bank or brokerage will tell you the current year's amount when you open the account.

You can only contribute money you earned from work—wages, salary, or self-employment income. You cannot fund a Roth IRA with investment returns, gifts, or inheritance. If you did not earn income that year, you cannot contribute, even if you have money in the bank.

The money you put in comes from your after-tax income. You do not get a tax deduction for it the way you would with a traditional IRA. That is the trade-off: no deduction now, but no taxes later.

Income limits that affect how much you can contribute

The IRS phases out Roth IRA contributions if your income is above a certain level. The exact threshold depends on your filing status—single, married filing jointly, or married filing separately—and it changes each year.

If your income is below the limit, you can contribute the full amount. If your income falls in a phase-out range, you can contribute a reduced amount. If your income is above the phase-out range, you cannot contribute directly to a Roth IRA that year, though you may have other options like a backdoor Roth conversion.

Your bank or brokerage will ask about your income when you open the account and will confirm you are within the limits. If your income changes during the year, you may need to reduce your contribution.

The difference between contributions and earnings, and when you can withdraw each

Your Roth IRA holds two types of money: the contributions you put in, and the earnings those contributions generated through investment growth. The IRS treats them differently when you withdraw.

Contributions can be withdrawn at any time, for any reason, without penalty or taxes. If you put in $5,000 and need that $5,000 back next year, you can take it. This is one of the biggest advantages of a Roth IRA—your contributions are always accessible.

Earnings are the investment gains on top of your contributions. If your $5,000 grew to $6,000, that $1,000 is earnings. You can withdraw earnings without penalty only after age 59½ and only if the account has been open for at least five years. If you withdraw earnings before then, you pay income tax on them plus a 10% penalty.

Why the five-year rule matters

The five-year rule is a clock that starts when you open your first Roth IRA. Once five years have passed, you can withdraw earnings penalty-free after age 59½. If you withdraw earnings before five years are up, you owe the 10% penalty even if you are over 59½.

This rule applies to the account itself, not to each contribution. If you open a Roth IRA in January 2024, the five-year clock starts then. By January 2029, you have satisfied the five-year requirement for that account, and any earnings withdrawn after age 59½ will be tax-free.

There are exceptions to the 10% penalty—for example, if you use earnings to pay for a first home purchase (up to $10,000 lifetime) or if you become disabled. But the five-year rule still applies in most cases.

No required withdrawals, which means your money can grow for decades

Unlike a traditional IRA, a Roth IRA has no required minimum distribution. You do not have to take money out at age 73 or any other age. If you do not need the money, you can leave it in the account to keep growing, and your heirs will inherit it tax-free.

This makes a Roth IRA useful if you expect to have other income sources in retirement and do not need to tap this account. It also makes it a tool for leaving money to the next generation without a large tax bill.

Your heirs will have to withdraw the inherited Roth IRA within ten years under current rules, but the withdrawals themselves are tax-free.

Where to open a Roth IRA and what happens after

You can open a Roth IRA at most banks, credit unions, and brokerages. Common places include Fidelity, Vanguard, Charles Schwab, and your own bank. Each institution has its own forms and online setup process, but the basic steps are the same: provide your name, Social Security number, address, and income information, then fund the account.

Once the account is open, you choose how to invest the money inside it. Some institutions offer a default money market fund or savings option if you do not choose. Most people invest in a mix of stock and bond funds based on how many years until retirement.

You can contribute to your Roth IRA every year until the deadline, which is usually April 15 of the following year. For example, you can contribute to your 2024 Roth IRA anytime between January 1, 2024, and April 15, 2025.

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 both accounts combined cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth IRA that year (assuming the $7,000 limit for 2024).

What happens if I withdraw money before age 59½?

You can withdraw your contributions anytime without penalty. If you withdraw earnings before 59½, you pay income tax on them plus a 10% penalty, unless an exception applies—such as a first-time home purchase, disability, or medical expenses above a certain threshold.

Can I convert a traditional IRA to a Roth IRA?

Yes, through a process called a Roth conversion. You move money from a traditional IRA to a Roth IRA, but you pay income tax on the amount converted that year. This is useful if your income is too high to contribute directly to a Roth, or if you expect lower taxes now than in retirement.

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

If you exceed the income phase-out range, you cannot contribute directly. However, you may be able to do a backdoor Roth conversion: contribute to a traditional IRA (which has no income limit) and then convert it to a Roth. This strategy has tax implications, so consider speaking with a tax professional.

Do I pay taxes on the money my Roth IRA earns?

No. The earnings grow tax-free inside the account. You do not pay taxes on dividends, interest, or capital gains while the money is in the Roth. You only pay taxes if you withdraw earnings before age 59½ and the five-year rule has not been satisfied.