An IRA is a tax-advantaged account you open yourself to save for retirement

An Individual Retirement Account (IRA) is a savings account with special tax rules that the federal government created to help people build retirement funds. You open it at a bank, brokerage, or credit union — not through an employer. The money you put in can grow over decades, and the tax treatment depends on which type of IRA you choose.

A Roth IRA is one of two main types. With a Roth, you contribute money that has already been taxed (after-tax dollars), and then the money grows tax-free. When you withdraw it in retirement, you owe no federal income tax on those withdrawals — not on the original money you put in, and 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 key difference between the two comes down to timing: pay taxes now (Roth) or pay taxes later (traditional). Both accounts have the same annual contribution limit, and both penalize you if you withdraw before age 59½ without a valid exception.

Key Takeaways

  • An IRA is a retirement savings account you open yourself, separate from any employer plan, with tax advantages built in by federal law.
  • A Roth IRA lets you contribute after-tax money and withdraw it tax-free in retirement, including all the growth your money earned.
  • You can contribute to a Roth IRA only if your income is below a certain threshold, which changes each year and varies by filing status.
  • Roth IRAs have no required withdrawals during your lifetime, so the account can keep growing and pass to heirs tax-free.
  • Withdrawals before age 59½ usually trigger a 10% penalty plus income tax, though some exceptions exist for hardship or first-time home purchase.

How much you can contribute to a Roth IRA each year

The annual contribution limit is the same for both Roth and traditional IRAs. For 2024, that limit is $7,000 if you are under age 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). These limits change periodically, so check the IRS website or your brokerage for the current year's amount.

However, a Roth IRA has an income limit that a traditional IRA does not. If your income exceeds a certain threshold, you cannot contribute the full amount — or cannot contribute at all. The threshold depends on your filing status (single, married filing jointly, married filing separately) and changes each year. For 2024, single filers begin to lose the ability to contribute at $146,000 in modified adjusted gross income, and married couples filing jointly at $230,000. If you earn above these ranges, you may still be able to use a "backdoor Roth" strategy, which involves contributing to a traditional IRA and converting it, though this requires careful planning.

Tax treatment: the core reason to choose Roth

With a Roth IRA, you pay income tax on the money before it goes into the account. That means the $7,000 you contribute comes from your after-tax paycheck. In return, everything that happens inside the account — dividends, capital gains, interest — is never taxed. When you retire and withdraw the money, the IRS does not tax you again.

This structure makes a Roth especially valuable if you expect to be in a higher tax bracket in retirement, or if you simply want the certainty of knowing exactly what you will owe in taxes (which is zero, on Roth withdrawals). It also means you can leave a Roth IRA to heirs, and they inherit the account tax-free — a major advantage over a traditional IRA.

Withdrawal rules and the 59½ age threshold

You can withdraw your original contributions to a Roth IRA at any time, tax-free and penalty-free. This is one of the most flexible features of a Roth. However, if you withdraw the earnings (the growth your money made), you will owe income tax and a 10% penalty unless you are at least 59½ years old and have held the account for at least five tax years.

There are exceptions to the 10% penalty. You can withdraw earnings without penalty if you use the money for a first-time home purchase (up to $10,000 lifetime), to pay medical expenses that exceed 7.5% of your adjusted gross income, to pay health insurance premiums while unemployed, or for certain disability or medical hardship situations. Even with these exceptions, you still owe income tax on the earnings — the penalty is what is waived.

No required withdrawals during your lifetime

A traditional IRA forces you to start withdrawing money at age 73 (as of 2023; this age has been rising). A Roth IRA has no such requirement. You can leave the money untouched for your entire life, letting it compound tax-free for as long as you want. This makes a Roth ideal if you do not need the retirement income immediately, or if you want to pass a large sum to your children or grandchildren.

After you die, your heirs will inherit the Roth IRA, and they must withdraw the funds within ten years under current law. However, those withdrawals are still tax-free to them — another advantage of the Roth structure.

Who should consider a Roth IRA

A Roth IRA works best if you are currently in a lower tax bracket than you expect to be in retirement, or if you have decades until retirement and want tax-free growth. It is also a good fit if you want flexibility (the ability to withdraw contributions anytime) or if you want to leave money to heirs without a tax bill.

A Roth is less useful if you need a tax deduction now to lower your current-year taxes, or if your income is too high to contribute. In those cases, a traditional IRA or an employer plan like a 401(k) may serve you better. Some people use both — contributing to a traditional IRA for the immediate tax break and a Roth for tax-free growth, as long as they stay within annual contribution limits across all accounts.

Where to open a Roth IRA and what to invest in

You can open a Roth IRA at most banks, credit unions, and brokerages. Common providers include Fidelity, Vanguard, Charles Schwab, and many others. The account itself is just a container; inside it, you choose what to invest in — stocks, bonds, mutual funds, exchange-traded funds (ETFs), or even keep cash. The brokerage will walk you through the setup process, which usually takes 15 to 30 minutes online.

The investment choices inside your Roth are separate from the tax advantage. The tax benefit applies no matter what you own. A beginner often starts with a low-cost target-date fund (a fund that automatically becomes more conservative as you approach retirement) or a simple index fund that tracks the overall stock market. The key is to start early and let compound growth do the work over time.

Frequently Asked Questions

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

Yes, but your total contributions across both accounts cannot exceed the annual limit ($7,000 in 2024 for those under 50). For example, you could contribute $4,000 to a Roth and $3,000 to a traditional IRA in the same year, but not $7,000 to each. Income limits on the Roth do not prevent you from opening a traditional IRA, so a traditional IRA can be a backup if your Roth income limit is exceeded.

What happens if I withdraw money before age 59½?

You can withdraw your contributions anytime without penalty. If you withdraw earnings before 59½ and do not meet an exception (first-time home purchase, disability, medical hardship), you owe income tax plus a 10% penalty on the earnings. The contributions themselves are never penalized. Many people use this flexibility to access contributions in a true emergency, though it reduces long-term growth.

Do I have to report my Roth IRA on my taxes?

You do not report contributions or withdrawals of contributions on your tax return. If you convert a traditional IRA to a Roth (a backdoor Roth), you report that conversion on Form 8606. Otherwise, a Roth IRA is largely invisible to the IRS once it is open — the tax benefit is built in.

Can I roll over a 401(k) into a Roth IRA?

Yes, but you will owe income tax on the amount you convert in that tax year. This is called a Roth conversion. It can make sense if you leave a job and have an old 401(k), or if you expect to be in a lower tax bracket that year. Consult a tax professional before converting, because the tax bill can be substantial.

What if my income is too high for a Roth IRA?

You can use a backdoor Roth strategy: contribute to a traditional IRA (which has no income limit), then immediately convert it to a Roth. You will owe taxes on any pre-tax money already in traditional IRAs, so this works cleanest if you have no existing traditional IRA balance. A tax professional can walk you through the steps and timing.