What a Roth IRA Is and How It Works

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

A Roth IRA is an individual retirement account that works backwards from a traditional IRA. You put money in after you have already paid income tax on it. The account grows tax-free, and when you withdraw the money in retirement, you owe no federal income tax on it — not on your contributions, not on the growth. This is the opposite of a traditional IRA, where contributions may be tax-deductible now but withdrawals are taxed later.

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 investment company. You decide how much to contribute each year (up to an annual limit set by the IRS, which changes yearly). You choose what to invest the money in — stocks, bonds, mutual funds, or keep it in cash. The money grows, and you control when and how much to withdraw after age 59½.

Key Takeaways

You contribute money you have already paid taxes on, so the IRS does not tax your withdrawals in retirement.
Your money grows tax-free inside the account, meaning you do not pay taxes on investment gains or dividends.
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 or a reduced amount each year, and these limits change annually.
A Roth IRA has no required minimum withdrawals during your lifetime, so you can leave the money untouched if you do not need it.

How contributions and taxes work in a Roth IRA

When you contribute to a Roth IRA, you use money you have already earned and paid income tax on. If you earned $50,000 last year and paid $8,000 in federal income tax, you can contribute some of that remaining $42,000 to a Roth IRA. The IRS does not give you a tax deduction for the contribution — you already paid tax on that income.

This is why the withdrawal side is different. Because you already paid tax on the money going in, the IRS does not tax you again when you take it out. If your $10,000 contribution grows to $25,000 over 20 years, you withdraw all $25,000 with no federal income tax owed. That $15,000 in growth is completely tax-free.

Income limits and contribution caps

The IRS sets an annual contribution limit for Roth IRAs. This limit applies to all your IRAs combined — if you have both a Roth IRA and a traditional IRA, your contributions to both cannot exceed the annual limit. The limit changes most years and depends on your age; people 50 and older can contribute an additional amount called a "catch-up contribution."

You can only contribute to a Roth IRA if your income falls below a certain threshold. These thresholds vary by filing status (single, married filing jointly, married filing separately) and change every year. If your income exceeds the limit, you cannot contribute the full amount — the allowed contribution phases out gradually. If your income is too high, you cannot contribute at all that year. The IRS publishes these limits each January on its website.

When you can withdraw money without penalty

You can withdraw your contributions (the money you deposited) at any time, for any reason, with no penalty and no tax. If you put in $5,000 and your account grew to $7,000, you can withdraw that original $5,000 whenever you need it. This is a major difference from a traditional IRA, where early withdrawals trigger a 10% penalty before age 59½.

Withdrawing the earnings — the $2,000 in growth — is different. You can withdraw earnings penalty-free only if you are 59½ or older and have held the account for at least five tax years. If you withdraw earnings before then, you owe a 10% penalty on the earnings plus income tax. There are a few exceptions: you can withdraw earnings without penalty for a first home purchase (up to $10,000 lifetime), disability, medical expenses, or a few other narrow situations.

No required withdrawals during your lifetime

A traditional IRA requires you to start taking withdrawals at age 73 (as of 2023; this age changes based on federal law). A Roth IRA has no such requirement. You never have to withdraw money if you do not want to. This makes a Roth IRA useful if you do not need the money in retirement or if you want to leave it to heirs.

Your heirs will inherit the account, but they will have to withdraw it within a set timeframe depending on their relationship to you and when you died. The rules changed in 2023 under the SECURE Act 2.0. A surviving spouse can treat the inherited Roth as their own, but most other heirs must empty the account within ten years. The withdrawals are still tax-free because the original account was a Roth.

Roth IRA versus traditional IRA: the main differences

A traditional IRA lets you deduct contributions from your taxable income now, lowering your tax bill this year. You pay taxes later when you withdraw. A Roth IRA gives you no deduction now but no taxes later. If you expect to be in a higher tax bracket in retirement, a Roth may save you money. If you expect to be in a lower bracket, a traditional IRA may be better.

Traditional IRAs have required minimum withdrawals starting at age 73. Roth IRAs do not. Traditional IRAs penalize early withdrawals; Roth IRAs let you withdraw contributions anytime. Traditional IRAs have no income limits; Roth IRAs do. The choice depends on your current income, expected retirement income, and how long you plan to let the money grow.

How to open a Roth IRA and what happens next

You open a Roth IRA by contacting a bank, brokerage firm, or investment company directly. Common providers include Vanguard, Fidelity, Charles Schwab, and most traditional banks. You will fill out an account application with your name, Social Security number, address, and employment information. You choose how much to contribute that year (up to the annual limit).

Once the account is open, you decide what to invest in. You can buy individual stocks, bonds, mutual funds, exchange-traded funds (ETFs), or leave the money in a money market account earning interest. The provider will give you access to a dashboard or website where you can monitor your balance, make trades, and track your contributions. You can contribute more money each year up to the annual limit, and you can change your investments whenever you want.

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 IRS limit. If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth that year if the limit is $7,000. You must track contributions across all accounts to stay within the limit.

What happens if I withdraw money before age 59½?

You can withdraw your contributions anytime without penalty. If you withdraw earnings before 59½ and you have not held the account for five tax years, you owe a 10% penalty plus income tax on the earnings. Exceptions exist for first-time home purchases (up to $10,000), disability, and certain medical expenses, but most early withdrawals of earnings trigger both penalty and tax.

Can I contribute to a Roth IRA if I am self-employed?

Yes. Your income limit is based on your net self-employment income after the self-employment tax deduction. You can also open a Solo 401(k) or SEP IRA as a self-employed person, which may allow higher contributions, but a Roth IRA is available to you as long as your income is below the threshold.

What if my income is too high to contribute?

If your income exceeds the limit, you cannot contribute directly. Some people use a "backdoor Roth" strategy: they contribute to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. This strategy has tax implications and works differently depending on whether you have other traditional IRAs. Consult a tax professional before attempting a backdoor conversion.

Do I have to invest the money in stocks, or can I keep it in cash?

You can keep it in cash in a money market account or savings account within the Roth IRA. You will earn interest, but it will grow more slowly than stocks or bonds historically have. Many people use a mix: some money in cash for safety and some in investments for growth. Your provider will show you all the options available in your account.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.