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

A Roth IRA is an individual retirement account that works backwards from a traditional IRA. You put in money you've already paid income tax on, the account grows tax-free, and when you reach retirement age, you pull money out without owing any taxes on the growth or the withdrawals. The tradeoff is that you don't get a tax deduction in the year you contribute—but decades of tax-free growth usually makes up for it.

The account is named after Senator William Roth, who sponsored the legislation that created it in 1997. You open one through a bank, brokerage, or credit union, and you decide what to invest the money in—usually stocks, bonds, mutual funds, or target-date funds. The account itself doesn't earn anything; your investments do.

Key Takeaways

  • You contribute after-tax dollars to a Roth IRA, meaning you don't reduce your taxable income in the year you contribute.
  • All investment growth and withdrawals in retirement are tax-free, as long as you follow the account rules.
  • You can withdraw your contributions (the money you put in) at any time without penalty, but earnings have restrictions until age 59½.
  • Income limits determine whether you can contribute directly to a Roth IRA, and these limits change each year.
  • You can open a Roth IRA at any age as long as you have earned income from a job or self-employment.

How contributions and withdrawals work

When you contribute to a Roth IRA, you're using money you've already paid federal income tax on. You don't report the contribution on your tax return as a deduction. In 2024, you can contribute up to $7,000 per year if you're under 50, or $8,000 if you're 50 or older. These limits change periodically, so check the IRS website for the current year.

The money you put in—called your basis—can be withdrawn anytime, tax-free and penalty-free. If you contributed $5,000 and your account grew to $12,000, you can pull out that original $5,000 whenever you want. The $7,000 in growth, however, is locked until you turn 59½ and the account has been open for at least five years. If you withdraw earnings before that, you'll owe income tax on them plus a 10% penalty.

Once you turn 59½ and your account has been open for five tax years, all withdrawals—contributions and earnings combined—are tax-free. You're also never required to take money out at any age, unlike traditional IRAs, which have mandatory withdrawals starting at 73.

Income limits and who can contribute

You can only contribute to a Roth IRA if you have earned income from a job or self-employment in that year. You can't fund one with investment returns, inheritance, or unemployment benefits. But there's a catch: if your income is too high, you can't contribute directly.

The income limits depend on your filing status and change each year. For 2024, if you're single, your ability to contribute phases out between $146,000 and $161,000 in modified adjusted gross income. If you're married filing jointly, it phases out between $230,000 and $240,000. If your income exceeds the upper limit, you can't contribute that year. If it falls in the phase-out range, you can contribute a reduced amount.

If your income is too high to contribute directly, you have another option: a backdoor Roth. You contribute to a traditional IRA (which has no income limit), then convert it to a Roth IRA. This is legal but has tax complications if you already have other traditional IRAs, so talk to a tax professional before doing it.

The five-year rule and when you can withdraw earnings

The Roth IRA has a five-year holding period that applies to earnings, not contributions. Your account must be open for at least five tax years before you can withdraw any investment growth tax-free. The clock starts on January 1 of the year you open the account, not the day you fund it.

This matters most if you're young and plan to retire early. If you open a Roth at age 35, you can withdraw earnings tax-free starting at age 59½ (as long as five years have passed). But if you open one at age 58, you still have to wait five years—until age 63—before earnings are accessible without penalty, even though you're already past 59½.

There are a few exceptions to the early withdrawal penalty on earnings: if you're disabled, a beneficiary receiving distributions after the account holder's death, or using up to $35,000 for a first home purchase (lifetime limit). These exceptions are narrow, so check the IRS rules if you think one applies to you.

Tax-free growth and why it matters over time

The real power of a Roth IRA is decades of tax-free compounding. In a traditional IRA or 401(k), you pay taxes on withdrawals, which means taxes eat into your retirement income. In a Roth, every dollar of growth stays yours. If you invest $7,000 a year for 30 years and your account grows to $500,000, you owe zero taxes on that $500,000 when you retire.

This advantage is biggest if you expect to be in a higher tax bracket in retirement, or if you think tax rates will rise. You're essentially locking in today's tax rate instead of gambling on tomorrow's. It's also valuable if you want to leave money to heirs—they inherit the account tax-free (though they do have to withdraw it within 10 years under current rules).

Roth IRA vs. traditional IRA: the main differences

A traditional IRA lets you deduct contributions from your taxable income in the year you make them, lowering your tax bill immediately. But you pay income tax on withdrawals in retirement. A Roth does the opposite: no deduction now, no taxes later. Both have the same contribution limits and the same $1,000 catch-up contribution if you're 50 or older.

The choice depends on your situation. If you're in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA saves you more money today. If you're early in your career with a low income, a Roth locks in a low tax rate and gives you decades of tax-free growth. Many people use both—a Roth for long-term growth and a traditional IRA or 401(k) for immediate tax relief.

How to open a Roth IRA and what to invest in

You can open a Roth IRA at almost any bank, credit union, or brokerage—Vanguard, Fidelity, Charles Schwab, and many others offer them. The process takes 15 to 30 minutes online. You'll need your Social Security number, address, and employment information. There's no fee to open the account, though some providers charge annual maintenance fees (usually $0 to $25) if your balance is below a certain amount.

Once the account is open, you choose what to invest in. Most people start with a target-date fund, which automatically adjusts from stocks to bonds as you approach retirement. Others pick individual stocks, index funds, or a mix. The account itself is just a container—the investments inside are what generate growth. If you're unsure what to pick, start with a low-cost index fund that tracks the whole stock market.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA?

Yes, you can have both. But your total contributions to all IRAs combined can't exceed the annual limit—$7,000 in 2024 if you're under 50. If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth that year.

What happens to my Roth IRA if I lose my job?

Your Roth IRA is yours alone and isn't tied to your employer. You keep it whether you're employed or not. You just can't contribute to it in years when you have no earned income, since contributions require income from a job or self-employment.

Can I withdraw my contributions before retirement?

Yes. Your contributions can be withdrawn anytime, tax-free and penalty-free. Only the earnings are restricted until age 59½. This makes a Roth useful as an emergency fund if you need access to your money before retirement.

What if I inherit a Roth IRA from someone else?

You inherit the account tax-free, but you must withdraw all the money within 10 years under current rules. The withdrawals themselves are tax-free. Talk to the account provider about how to set this up, since the process varies by institution.

Do I have to invest in stocks, or can I keep cash in my Roth?

You can keep cash in your Roth IRA in a money market fund or savings option, though it won't grow much. Most people invest in stocks or funds because the account is meant for long-term growth and you have decades before you need the money.