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

The core idea is simple: you put after-tax dollars in now, the money grows over decades, and when you retire and take the money out, you owe no federal income tax on any of it—not on your original contributions and not on the growth. That's the opposite of a traditional IRA, where you get a tax break when you contribute but pay taxes on withdrawals later.

You open a Roth IRA through a bank, brokerage, or credit union. You then decide how much to contribute each year (up to a limit set by the IRS, which changes annually). The money sits in the account and you choose what to invest it in—usually stocks, bonds, mutual funds, or target-date funds. The account grows tax-free, and as long as you follow the rules, you can pull it out in retirement without a tax bill.

Key Takeaways

  • You contribute after-tax money to a Roth IRA, meaning you pay income tax on the money before it goes in, but withdrawals in retirement are completely tax-free.
  • The IRS sets an annual contribution limit (for 2024 it is $7,000 for most people under 50, and $8,000 for those 50 and older), and you can only contribute if you have earned income that year.
  • Your money grows tax-free inside the account, and you can withdraw your original contributions at any time without penalty, though earnings have age and holding-period rules.
  • 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 vary by filing status.
  • A Roth IRA has no required withdrawals during your lifetime, so the money can stay invested and grow for as long as you live.

How contributions and withdrawals work

You can contribute to a Roth IRA only if you have earned income—wages from a job, self-employment income, or similar. You cannot fund one with investment returns, inheritance, or unemployment benefits. The annual limit is set by the IRS and increases most years; for 2024 it is $7,000 if you are under 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution).

You can withdraw your original contributions at any time, for any reason, with no tax or penalty. If you withdraw earnings before age 59½, you typically owe income tax on those earnings plus a 10% penalty—unless you meet a narrow exception like a first-time home purchase (up to $10,000 lifetime) or a may have access to disability. After age 59½, as long as the account has been open for at least five years, you can withdraw everything tax-free.

Income limits and who can contribute

The IRS limits who can contribute based on your modified adjusted gross income (MAGI) and your filing status. If you are single and your MAGI is above a certain level, your contribution amount phases out; if it goes above the upper limit, you cannot contribute at all. If you are married filing jointly, the limits are higher. If you are married filing separately, the limits are much lower.

These limits change every year. For 2024, a single filer with MAGI over roughly $161,000 begins to lose contribution room, and cannot contribute at all above roughly $176,000. A married couple filing jointly can contribute fully up to roughly $240,000 in MAGI. Because limits shift annually, check the IRS website or your brokerage each year before you contribute.

The five-year rule and early withdrawal penalties

The five-year rule is often misunderstood. It means your account must have been open for at least five years before you can withdraw earnings tax-free, even after age 59½. The clock starts on January 1 of the year you open the account, not on the day you fund it. If you open a Roth IRA in December 2024 and fund it in January 2025, the five years still begins in 2024.

If you withdraw earnings before age 59½ and before five years have passed, you owe income tax on the earnings plus a 10% penalty. The exceptions are narrow: first-time home purchase (up to $10,000 lifetime), may have access to education expenses, birth or adoption of a child (up to $35,000 lifetime), and a few others. Your contributions themselves are always penalty-free to withdraw.

Tax-free growth and no required withdrawals

Money inside a Roth IRA grows without being taxed each year. If you own stocks that pay dividends or bonds that pay interest, you do not owe tax on those earnings while they sit in the account. This tax-free compounding is one of the main reasons people use Roth IRAs—the longer the money stays invested, the more it grows without a tax drag.

Unlike a traditional IRA, a Roth IRA has no required minimum distributions (RMDs). You never have to withdraw money during your lifetime, even after age 73. This means your account can keep growing and compounding, and you can leave it to heirs. Your beneficiaries will inherit the account tax-free, though they will have to withdraw it over a set period (usually 10 years under current rules).

Roth IRA versus traditional IRA: the main differences

A traditional IRA gives you a tax deduction when you contribute (if you meet income limits and do not have an employer retirement plan), but you pay income tax on withdrawals in retirement. A Roth IRA gives you no deduction now, but withdrawals are tax-free later. If you expect to be in a higher tax bracket in retirement, a Roth is often the better choice. If you expect to be in a lower bracket, a traditional IRA may save you more tax overall.

A traditional IRA requires you to start taking withdrawals at age 73 (as of 2023, under the SECURE 2.0 Act). A Roth has no such requirement. A traditional IRA allows you to deduct contributions if you have no workplace retirement plan, or if your income is below certain limits. A Roth has income limits on who can contribute at all. Both accounts have the same annual contribution limit and the same catch-up amount for those 50 and older.

How to open and fund a Roth IRA

You can open a Roth IRA at nearly any bank, credit union, or brokerage—Vanguard, Fidelity, Charles Schwab, and many others offer them. The process is usually online and takes 10 to 15 minutes. You will need your Social Security number, address, and employment information. You then choose how to invest the money: some people pick a single target-date fund (a fund that automatically shifts from stocks to bonds as you near retirement), others build a portfolio of index funds or individual stocks.

You can fund the account by transferring money from your bank account, or by rolling over money from another IRA or an old 401(k) (though rolling a traditional IRA or 401(k) into a Roth creates a taxable event). You can contribute as little as $1 or as much as the annual limit. Many brokerages allow automatic monthly contributions, which can help you build the habit of saving without thinking about it.

Frequently Asked Questions

Can I contribute to both a Roth IRA and a traditional IRA in the same year?

Yes, but your total contributions to both accounts cannot exceed the annual limit. If you contribute $4,000 to a traditional IRA, you can contribute only $3,000 to a Roth that same year (assuming the limit is $7,000). The limit is shared across all IRAs you own.

What happens if I exceed the contribution limit?

If you contribute more than allowed, the IRS charges a 6% excise tax on the excess each year it stays in the account. You can withdraw the excess and any earnings on it before your tax return is due (usually April 15 the following year) to avoid the penalty. If you do not, you owe the 6% tax annually until the excess is removed.

Can I convert a traditional IRA to a Roth?

Yes, through a process called a Roth conversion. You move money from a traditional IRA into a Roth IRA, and you owe income tax on the amount converted that year. There is no income limit on conversions, so even high earners can use this strategy. However, if you have other traditional IRAs, the IRS pro-rata rule may apply, which can complicate the tax calculation.

What if my income is too high to contribute?

If your income exceeds the limit, you cannot contribute directly. However, you can use a "backdoor Roth" strategy: contribute to a traditional IRA (which has no income limit), then convert it to a Roth. This works only if you have no other traditional IRAs, SEP IRAs, or SIMPLE IRAs, due to the pro-rata rule.

Can I withdraw my contributions anytime without penalty?

Yes. Your original contributions can be withdrawn at any time, at any age, for any reason, with no tax or penalty. Only earnings are subject to the age 59½ rule and the five-year holding period. This makes a Roth IRA more flexible than a traditional IRA if you need access to your money before retirement.