What a Roth IRA Is and How It Works

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 difference between a Roth IRA and other retirement accounts is when you pay taxes. With a Roth IRA, you put in after-tax dollars now—money you've already paid income tax on—and when you take money out after age 59½, you owe nothing to the IRS. That's the opposite of a traditional IRA or 401(k), where you get a tax deduction when you contribute but pay taxes on withdrawals later.

You open a Roth IRA through a bank, brokerage firm, or credit union. You choose how to invest the money inside it—stocks, bonds, mutual funds, or just keep it in cash. The account itself doesn't earn money; your investments do. The IRS sets a yearly limit on how much you can contribute. For 2024, that limit is $7,000 if you're under 50, and $8,000 if you're 50 or older. You can contribute only if you have earned income from a job or self-employment.

Key Takeaways

You contribute after-tax money to a Roth IRA, and all growth and withdrawals are tax-free after age 59½, as long as the account has been open for at least five years.
The IRS limits how much you can contribute each year—$7,000 for 2024 if you're under 50—and you must have earned income to contribute at all.
You can withdraw your contributions (the money you put in) at any time without penalty, but earnings withdrawn before 59½ usually trigger taxes and a 10% penalty.
Income limits apply: if you earn above a certain threshold, you cannot contribute directly to a Roth IRA, though a "backdoor Roth" strategy exists for higher earners.
A Roth IRA has no required withdrawals during your lifetime, so the money can grow for decades and pass to heirs with tax advantages.

How contributions and withdrawals work

You can contribute to a Roth IRA as long as you have earned income and you haven't exceeded the annual limit. Contributions can be made until the tax filing deadline the following year—usually April 15. You don't get a tax deduction for contributing, which is why the money going in is already taxed.

Withdrawals follow a specific order. If you take money out before age 59½, you can always withdraw your contributions (the dollars you put in) without penalty or tax. But if you try to withdraw the earnings (the investment gains), the IRS treats it as early withdrawal and charges a 10% penalty plus income tax on that amount. There are a few exceptions—first-time home purchase (up to $10,000 lifetime), disability, or medical expenses—but the general rule is: contributions out anytime, earnings only after 59½.

After age 59½, if your account has been open for at least five years, you can withdraw everything tax-free. This five-year rule applies to the account itself, not to each contribution, so if you opened your Roth IRA in 2020, you can take tax-free withdrawals starting in 2025 regardless of when you made individual contributions.

Income limits and who can contribute

The IRS restricts who can contribute directly to a Roth IRA based on your modified adjusted gross income (MAGI). The limits change yearly and depend on your filing status. For 2024, if you're single, the ability to contribute phases out between $146,000 and $161,000 of income. If you're married filing jointly, it phases out between $230,000 and $240,000. If your income exceeds the upper limit, you cannot contribute directly.

If your income is too high, a backdoor Roth strategy lets you work around the limit. You contribute to a traditional IRA (which has no income limit), then convert it to a Roth IRA. This is legal but has tax consequences if you already have other traditional IRA balances. You'll need to talk to a tax professional before attempting this, because the math involves the "pro-rata rule" and can get complicated.

The five-year rule explained

The five-year rule is often misunderstood. It doesn't mean you have to wait five years for each contribution. It means your Roth IRA account itself must have been open for five years before you can withdraw earnings tax-free. The clock starts on January 1 of the year you open the account.

If you opened your Roth IRA on December 1, 2020, the five-year period ends on January 1, 2025. After that date, you can withdraw earnings without tax or penalty (assuming you're 59½ or older). If you opened it in 2024, the five-year period doesn't end until 2029. This rule applies even if you convert a traditional IRA to a Roth—the five-year clock starts fresh with the conversion.

Roth IRA versus traditional IRA

The main trade-off is timing of taxes. A traditional IRA lets you deduct contributions from your taxes now, lowering your tax bill in the year you contribute. But you pay income tax on withdrawals in retirement. A Roth IRA gives you no deduction now, but withdrawals are tax-free later. Both have the same annual contribution limit ($7,000 for 2024 under age 50) and the same 10% early withdrawal penalty on earnings.

Traditional IRAs have required minimum distributions (RMDs) starting at age 73—you must withdraw a certain amount each year whether you need it or not. Roth IRAs have no RMDs during your lifetime, so your money can keep growing untouched. This makes a Roth better if you don't need the money in retirement or want to leave it to heirs. A traditional IRA may be better if you want a tax deduction now and expect to be in a lower tax bracket in retirement.

Investment options inside a Roth IRA

Once you open a Roth IRA, you decide what to invest the money in. Most providers offer stocks, bonds, mutual funds, exchange-traded funds (ETFs), and sometimes individual options like CDs or money market accounts. Some providers also allow self-directed investing, where you can buy real estate, private loans, or other alternative investments, though this requires more knowledge and carries more risk.

You can also hold cash in a Roth IRA and not invest it at all—it just won't grow. Many people starting out keep their Roth IRA in a high-yield savings account or money market fund while they learn about investing, then move the money into stocks or funds later. You can change your investments as often as you want without tax consequences, because all growth inside the account is tax-free.

What happens to a Roth IRA when you die

When you pass away, your Roth IRA goes to whoever you named as beneficiary on the account. They inherit it with the same tax-free withdrawal rules. If they're a spouse, they can treat it as their own Roth IRA or roll it into their own account. Non-spouse beneficiaries must withdraw the balance within 10 years under current rules, but the withdrawals are still tax-free.

This makes a Roth IRA a powerful tool for leaving money to heirs. Unlike a traditional IRA, where heirs owe income tax on withdrawals, Roth IRA withdrawals by beneficiaries are tax-free. If you have a long time until retirement, a Roth IRA can grow for decades and pass to the next generation without any tax bill.

Frequently Asked Questions

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

Yes, you can have both. However, your total contributions to both accounts combined cannot exceed the annual limit ($7,000 for 2024 under age 50). If you contribute $4,000 to a traditional IRA, you can only contribute $3,000 to a Roth that year.

What if I need money before retirement?

You can withdraw your contributions anytime without penalty or tax. If you need to withdraw earnings before age 59½, you'll owe income tax plus a 10% penalty on that amount, unless you may have access to for an exception like first-time home purchase (up to $10,000 lifetime) or disability.

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

Yes, as long as you have net self-employment income. You can contribute up to the annual limit or your net earnings, whichever is smaller. You must have earned income—you cannot contribute based on investment returns or spousal income alone.

What if my income is too high to contribute?

If you exceed the income limit, you cannot contribute directly. A backdoor Roth conversion is a legal workaround where you contribute to a traditional IRA and convert it to a Roth, but this has tax implications if you have other traditional IRA balances. Consult a tax professional before attempting this.

Do I have to invest the money in my Roth IRA?

No. You can hold cash, keep it in a money market account, or buy a CD. The money won't grow as much as it would in stocks or funds, but it's an option if you're not ready to invest or want to keep some funds safe while you learn.

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.