A Roth IRA earns money the same way any investment account does: through the returns on what you buy inside it

The Roth IRA itself is not an investment. It is a container — a tax-sheltered account where you can hold stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other investments. The money grows because those holdings go up in value, pay dividends, or earn interest. The Roth part means you do not pay federal income tax on those earnings when you withdraw them in retirement, as long as you follow the withdrawal rules.

You fund a Roth IRA with after-tax dollars (money you have already paid income tax on). Once inside, that money sits in whatever investments you choose. If you buy a stock mutual fund and it gains 8 percent in a year, your account grows by 8 percent. If you buy bonds that pay 4 percent interest, you earn 4 percent. The growth happens in the market, not because the Roth label itself creates returns.

Key Takeaways

  • A Roth IRA grows through the investment returns of whatever you hold inside it — stocks, bonds, funds, or other securities — not from the account type itself.
  • You choose what to invest in; most Roth IRAs are held at brokerages like Fidelity, Vanguard, or Schwab, where you pick individual holdings or fund portfolios.
  • Earnings inside a Roth IRA are not taxed each year, and may have access to withdrawals in retirement are tax-free, which is the main advantage over a regular taxable brokerage account.
  • You can contribute up to $7,000 per year (or $8,000 if you are 50 or older) in 2024, but you can only contribute if you have earned income and your income is below the phase-out limits.
  • If you withdraw earnings before age 59½ and before the account has been open five years, you will owe income tax and a 10 percent penalty on those earnings.

Where you hold your Roth IRA and what you can invest in

You open a Roth IRA at a brokerage firm, not at a bank. The major custodians are Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge, though many smaller brokerages also offer them. When you open the account, you fund it with a contribution (up to $7,000 per year in 2024 if you are under 50). Then you decide what to buy inside it.

Most people choose one of three paths: buy individual stocks, buy mutual funds, or buy ETFs. A mutual fund pools money from many investors and a manager buys a basket of stocks or bonds. An ETF is similar but trades like a stock throughout the day. Both spread your money across many holdings, which reduces risk. Individual stocks concentrate your bet on one company. You can also hold bonds, money market funds, or CDs inside a Roth IRA, though these typically earn lower returns over long periods.

The brokerage does not tell you what to buy. You make that choice. If you do not want to pick individual investments, many brokerages offer target-date funds — funds that automatically shift from stocks to bonds as you approach retirement — or robo-advisors that build a portfolio for you based on your age and risk tolerance.

How tax-free growth works in a Roth IRA

In a regular taxable brokerage account, you pay federal income tax on dividends and interest each year, and capital gains tax when you sell an investment for a profit. Those taxes reduce your net return. In a Roth IRA, you pay no tax on any of that growth while the money sits in the account.

If you invest $7,000 in a stock fund and it grows to $15,000 over 20 years, that $8,000 gain is not taxed inside the Roth. When you withdraw the $15,000 after age 59½ (and the account has been open at least five years), you owe no federal income tax on any of it — not the original contribution, not the earnings. This is the core advantage of a Roth over a taxable account. Over decades, the compounding effect of not paying taxes each year can add significantly to your balance.

This tax-free treatment applies only to may have access to withdrawals. You must be at least 59½ years old and the account must have been open for at least five tax years. If you withdraw earnings before meeting both conditions, you owe income tax on the earnings plus a 10 percent early withdrawal penalty.

Contribution limits and income phase-outs

You can contribute up to $7,000 per year to a Roth IRA in 2024 if you are under 50, or $8,000 if you are 50 or older. However, you can only contribute if you have earned income (wages, self-employment income, or other compensation) in that year. You cannot contribute if your only income is from investments or Social Security.

There is also an income phase-out. In 2024, if you are single and your modified adjusted gross income (MAGI) exceeds $146,000, you cannot contribute the full amount. If your MAGI exceeds $161,000, you cannot contribute at all. For married couples filing jointly, the limits are $230,000 and $240,000. These limits change each year. If your income is above the phase-out range, a backdoor Roth conversion is an alternative strategy, though it involves more steps and tax considerations.

The difference between Roth contributions and conversions

A Roth contribution is money you add directly to a Roth IRA each year, up to the annual limit. A Roth conversion is when you move money from a traditional IRA, SEP IRA, or 401(k) into a Roth IRA. When you convert, you owe income tax on the amount converted (unless it was already after-tax money), but once it is in the Roth, future growth is tax-free.

Conversions are useful if your income is too high to contribute directly, or if you want to move a large sum into a tax-free account. However, conversions trigger a tax bill in the year you convert, so they work best when your income is temporarily low or when you have cash set aside to pay the tax. Many people do conversions in years they are between jobs or have lower income than usual.

How investment choices affect your returns

The growth rate of your Roth IRA depends entirely on what you invest in. A stock-heavy portfolio might average 8 to 10 percent per year over long periods, but will fluctuate more year to year. A bond-heavy portfolio might average 3 to 5 percent, with less volatility. A mix of both — often called a balanced portfolio — typically averages 5 to 7 percent.

These are historical averages, not guarantees. Past performance does not predict future results. Your actual return depends on which specific stocks, bonds, or funds you choose, when you buy and sell, and broader economic conditions. Someone who invested heavily in technology stocks in the 1990s saw much higher returns than someone who invested in utilities. Someone who bought bonds in 2021 and held them as interest rates rose saw losses.

The advantage of a Roth IRA is that you can take more risk with your money because you do not pay taxes on the gains. If you are 30 years old and will not touch the money until 65, you can afford to hold mostly stocks because you have time to recover from downturns. If you are 60, you might shift toward bonds to protect what you have built. The tax-free growth applies to whatever mix you choose.

Rebalancing and managing your Roth IRA over time

Once you have chosen your investments, you do not have to do anything. Your holdings will grow or shrink based on market performance. However, many investors rebalance once or twice a year — selling some of the investments that have grown large and buying more of the ones that have shrunk, to keep their portfolio aligned with their target mix.

Rebalancing inside a Roth IRA is tax-free. If you sell a fund that has doubled in value and buy another fund with the proceeds, you owe no capital gains tax. This is another advantage of the Roth: you can trade and adjust your holdings without worrying about tax consequences. In a taxable account, frequent trading can trigger large capital gains taxes.

You can also make penalty-free withdrawals of your original contributions (not the earnings) at any time, for any reason. This makes a Roth IRA slightly more flexible than a traditional IRA or 401(k), where early withdrawals of any kind trigger penalties. However, most financial advisors recommend leaving your Roth IRA untouched until retirement so the money has as much time as possible to grow.

Frequently Asked Questions

Can I lose money in a Roth IRA?

Yes. If you invest in stocks or stock funds and the market declines, your account balance will fall. The Roth IRA is a tax-sheltered container, not a may provide of returns. Your actual gains or losses depend on what you hold inside it. If you hold only cash or money market funds, you will not lose principal, but you will earn very low returns.

What happens if I withdraw money before age 59½?

You can withdraw your contributions (the money you put in) at any time without penalty or tax. If you withdraw earnings before age 59½ and the account has not been open five years, you owe income tax on the earnings plus a 10 percent penalty. There are a few exceptions, such as withdrawals for a first home purchase (up to $10,000 lifetime) or certain medical expenses, but most early withdrawals of earnings are penalized.

Do I have to pick my own investments, or can someone else manage my Roth IRA?

You can do it yourself, or you can use a robo-advisor (an automated service that builds and rebalances a portfolio for you based on your age and risk tolerance). Most brokerages offer robo-advisors for a small fee, usually 0.25 to 0.50 percent of your account balance per year. You can also hire a financial advisor, though that is typically more expensive and is usually worth it only if you have a large account.

If I have a 401(k) at work, can I also have a Roth IRA?

Yes. You can have both a 401(k) and a Roth IRA at the same time. However, your ability to contribute to a Roth IRA depends on your income, not on whether you have a 401(k). If your income is above the phase-out limits, you cannot contribute to a Roth directly, even if you have a 401(k). A backdoor Roth conversion is an alternative in that case.

How often should I check my Roth IRA balance?

There is no set rule. Some people check monthly, others quarterly or annually. Frequent checking can lead to emotional decisions based on short-term market swings. Most advisors suggest checking at least once a year to make sure your portfolio is still aligned with your target mix, and rebalancing if needed. If you are using a target-date fund or robo-advisor, rebalancing happens automatically.