You put money in after taxes, it grows tax-free, and you withdraw it tax-free in retirement

A Roth IRA is a retirement savings account where you contribute money that has already been taxed. That money then grows without being taxed each year, and when you withdraw it in retirement, you pay no tax on the growth or the original contributions. The tradeoff is that you do not get a tax deduction when you put the money in—unlike a traditional IRA—but the long-term payoff is that your withdrawals are completely tax-free.

The account works in three phases: contribution, growth, and withdrawal. During contribution, you send money to the Roth IRA account (usually through a bank, brokerage, or investment firm). During growth, that money sits invested in stocks, bonds, mutual funds, or other securities you choose, and any gains are not taxed year to year. During withdrawal, you can take out your contributions anytime without penalty, and after age 59½, you can withdraw the growth tax-free as long as the account has been open for at least five years.

Key Takeaways

  • You contribute after-tax dollars, meaning you do not reduce your taxable income in the year you contribute, but all future growth and withdrawals are tax-free.
  • Your money grows in the account without triggering taxes each year, even if you earn dividends or capital gains.
  • You can withdraw your contributions (the money you put in) at any time without penalty, but growth can only be withdrawn tax-free after age 59½ and five years of account ownership.
  • Income limits determine whether you can contribute the full amount each year, and these limits change annually based on your filing status and modified adjusted gross income.
  • You do not have to take required minimum distributions from a Roth IRA during your lifetime, unlike traditional IRAs, which gives you more control over when to withdraw.

How contributions work and what you can put in each year

You can contribute up to a set dollar amount per year, which the IRS adjusts annually for inflation. 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). You can contribute this amount only if you have earned income—wages, self-employment income, or other compensation—in that year. If you have no income, you cannot contribute.

The money you contribute must come from your own pocket; you cannot borrow it or roll it from another account type without following specific rules. You can contribute in a lump sum or spread it across the year in smaller deposits. The deadline to contribute for a given tax year is usually April 15 of the following year (the tax filing deadline), which gives you extra time if you want to catch up.

However, if your income is above a certain threshold, you may not be able to contribute the full amount—or contribute at all. These income limits vary by filing status and change each year. For example, in 2024, if you file as single and your modified adjusted gross income is above $146,000, you cannot contribute. If you file as married filing jointly, the limit is higher. You should check the IRS website or ask your financial institution what the current limits are for your situation.

How your money grows inside the account

Once your money is in the Roth IRA, you choose how to invest it. Most Roth IRAs are held at a bank or brokerage (such as Fidelity, Vanguard, or Charles Schwab), and you can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), or other securities offered by that institution. Some people choose a simple approach—a single target-date fund that automatically shifts from stocks to bonds as they near retirement. Others build a custom portfolio.

The key advantage is that any earnings—dividends, capital gains, interest—are not taxed inside the account. If you own a stock that pays $500 in dividends, you do not owe tax on that $500 in the year you receive it. If you sell a mutual fund for a $2,000 gain, that gain is not taxed. This tax-free compounding is what makes a Roth IRA powerful over decades: your money grows faster because you are not paying taxes along the way.

You can also move money between investments within the same Roth IRA without triggering taxes. If you decide to shift from stocks to bonds, or from one mutual fund to another, there is no tax consequence. This flexibility lets you rebalance your portfolio as your goals or risk tolerance change.

The five-year rule and when you can withdraw

The five-year rule is a common source of confusion. It states that you cannot withdraw the growth (earnings) from your Roth IRA tax-free until the account has been open for at least five years. The clock starts on January 1 of the year you first contribute to any Roth IRA. If you open a Roth IRA in March 2024 and contribute, the five-year period runs from January 1, 2024, and ends on December 31, 2028.

Your contributions, however, are not subject to this rule. You can withdraw the money you personally put in at any time, for any reason, without penalty or tax. If you contributed $10,000 and the account grew to $12,000, you can withdraw the $10,000 anytime. The $2,000 in growth is what the five-year rule applies to.

After age 59½ and once the five-year period is met, you can withdraw both contributions and growth completely tax-free. Before age 59½, you can still withdraw contributions without penalty, but if you withdraw growth before that age, you owe income tax on the growth plus a 10% penalty—unless an exception applies (such as disability, first-time home purchase up to $10,000 lifetime, or may have access to education expenses).

Income limits and who can contribute

Roth IRA contributions are limited based on your income, and these limits are different from the dollar limits mentioned earlier. The IRS uses your modified adjusted gross income (MAGI) to determine whether you can contribute and how much. MAGI is roughly your total income with certain deductions added back; your tax preparer or financial institution can calculate it for you.

The income limits depend on your filing status. Single filers have one set of limits, married filing jointly have higher limits, and married filing separately have much lower limits. These limits increase each year. If your income falls below the limit, you can contribute the full annual amount. If it falls within a phase-out range, you can contribute a reduced amount. If it exceeds the upper limit, you cannot contribute to a Roth IRA directly.

If your income is too high to contribute directly, you may still be able to use a strategy called a backdoor Roth: you contribute to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. This is legal but involves tax considerations, so it is worth discussing with a tax professional if your income is near or above the limit.

No required withdrawals during your lifetime

Unlike a traditional IRA or 401(k), a Roth IRA has no required minimum distributions (RMDs) during your lifetime. This means you do not have to withdraw money at age 73 (the current RMD age) or any other age. You can let the account sit and grow for as long as you live, which is a major advantage if you do not need the money or want to leave it to heirs.

Your heirs will inherit the Roth IRA and can withdraw from it, though they will have their own rules about how quickly they must empty the account. The tax-free growth benefit passes to them as well, making a Roth IRA a powerful wealth-transfer tool.

Conversions from traditional IRAs and rollovers

You can move money from a traditional IRA into a Roth IRA through a process called a conversion. When you convert, you pay income tax on the amount converted in that year, but the money then grows tax-free in the Roth IRA going forward. Conversions are useful if you expect to be in a lower tax bracket in the year you convert, or if you believe tax rates will be higher in retirement.

You can also roll over money from a 401(k) or other employer plan into a Roth IRA, though this also triggers taxes on the pre-tax portion. The rules around conversions and rollovers are detailed, and a tax professional can help you understand whether a conversion makes sense for your situation.

Frequently Asked Questions

Can I withdraw my contributions before retirement without penalty?

Yes. You can withdraw the money you personally contributed to your Roth IRA at any time, for any reason, without paying taxes or a 10% penalty. The five-year rule and age restrictions apply only to the growth (earnings) in the account, not to your contributions.

What happens if I withdraw growth before age 59½?

If you withdraw earnings before age 59½ and the account has not been open for five years, you owe income tax on the earnings plus a 10% penalty. However, exceptions exist for disability, first-time home purchase (up to $10,000 lifetime), and may have access to education expenses. Check with a tax professional about whether your situation qualifies.

Can I have more than one Roth IRA?

Yes, you can have multiple Roth IRAs at different institutions. However, your total contributions across all Roth IRAs cannot exceed the annual limit ($7,000 or $8,000 in 2024). The five-year rule applies to your first Roth IRA contribution, not to each account separately.

What if my income goes above the limit after I contribute?

If your income rises after you contribute, you have already made the contribution and it counts toward your limit for that year. However, if your income exceeds the limit before you contribute, you should not contribute the full amount. Excess contributions are subject to a 6% penalty each year they remain in the account, so it is important to check the limits before you contribute.

Do I pay taxes on dividends and capital gains inside a Roth IRA?

No. All earnings—dividends, interest, and capital gains—grow tax-free inside the Roth IRA. You only pay taxes if you withdraw the growth before meeting the age and five-year requirements. This tax-free compounding is one of the main reasons people use Roth IRAs for long-term retirement savings.