A Roth IRA is a retirement savings account where you contribute money that has already been taxed, and then your withdrawals in retirement come out tax-free

The key difference from other retirement accounts is the tax timing. With a traditional IRA, you get a tax deduction when you contribute, but you pay income tax on the money when you withdraw it in retirement. With a Roth IRA, you pay income tax on the money before you put it in, but the withdrawals themselves—including all the growth your money earned—are never taxed again.

The name comes from Senator William Roth, who sponsored the legislation that created it in 1997. It is a specific type of individual retirement account (IRA), meaning it is a personal account you open yourself, not one tied to an employer. You control what happens inside it, and the account itself has no required withdrawals during your lifetime.

Key Takeaways

  • You fund a Roth IRA with after-tax dollars, meaning you cannot deduct the contribution from your income taxes that year.
  • All growth inside the account and all withdrawals in retirement are tax-free, as long as the account has been open for at least five years and you are at least 59½ years old.
  • Your income determines whether you can contribute the full amount, and income limits phase out contributions for higher earners each year.
  • You can withdraw the money you contributed (not the earnings) at any time without penalty, even before retirement.
  • Unlike a traditional IRA, a Roth IRA has no required minimum withdrawals, so your money can keep growing tax-free for as long as you leave it alone.

How contributions and withdrawals work in a Roth IRA

When you put money into a Roth IRA, you are using money you have already paid income tax on. You cannot deduct that contribution from your taxes. The IRS allows you to contribute up to a set dollar amount each year—this limit changes annually and depends on your age. For 2024, the limit is $7,000 if you are under 50, and $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution).

The money you put in is called your basis. You can always withdraw your basis without paying taxes or penalties, no matter your age or how long the account has been open. If you contributed $5,000 and your account grew to $8,000, you can withdraw that original $5,000 anytime. The $3,000 in earnings stays in the account unless you meet the withdrawal rules.

To withdraw the earnings tax-free, two conditions must be met: the account must have been open for at least five years, and you must be at least 59½ years old. If you withdraw earnings before meeting both conditions, you pay income tax on the earnings and a 10% penalty. There are a few exceptions to the penalty—for example, if you are a first-time homebuyer, you can withdraw up to $10,000 in earnings for a down payment.

Income limits and who can contribute

Not everyone can contribute the full amount to a Roth IRA. The IRS sets income limits that change each year, and your ability to contribute depends on your modified adjusted gross income (MAGI). If your income is below the limit, you can contribute the full amount. As your income rises above the limit, the amount you can contribute shrinks. Once your income exceeds the upper limit, you cannot contribute at all that year.

These limits are different for single filers, married filing jointly, and married filing separately. For 2024, a single filer with a MAGI of $146,000 or more cannot contribute. A married couple filing jointly cannot contribute if their MAGI is $230,000 or more. These numbers shift upward each year, so you will need to check the current year's limits when you are ready to contribute.

If your income is too high to contribute directly, you have another option called a backdoor Roth. This involves contributing to a traditional IRA first and then converting it to a Roth. The mechanics are more complex, and tax consequences depend on whether you already have other traditional IRAs, so you should talk to a tax professional before attempting this.

The five-year rule and when you can access your money

The five-year rule is one of the most misunderstood parts of a Roth IRA. It does not mean you have to wait five years to withdraw your contributions—you can do that anytime. Instead, it means you must wait five years from the date you first opened any Roth IRA before you can withdraw the earnings tax-free.

The clock starts on January 1 of the year you open your first Roth IRA, not on the date you make your first contribution. If you open an account on December 31 and contribute $100, the five-year period starts on January 1 of that same year. If you open an account on January 15 and contribute $100, the five-year period also starts on January 1 of that year. This rule applies across all Roth IRAs you own—you cannot reset the clock by opening a new account.

Once five years have passed and you reach 59½, you can withdraw everything—contributions and earnings—tax-free. If you withdraw before 59½ but after five years, you can withdraw your contributions penalty-free, but earnings are still subject to the 10% penalty and income tax (with some exceptions).

Tax-free growth and no required withdrawals

Money inside a Roth IRA grows tax-free. If you invest in stocks, bonds, mutual funds, or other investments, you do not pay taxes on the gains each year like you would in a regular taxable brokerage account. Dividends and capital gains accumulate without triggering a tax bill until you withdraw the money.

Unlike a traditional IRA, a Roth IRA has no required minimum distributions (RMDs). This means you never have to withdraw money from the account, even after you turn 73 (the age when traditional IRA owners must start taking RMDs). Your money can keep growing tax-free for your entire life, and you can pass it to your heirs with the same tax-free growth intact.

Where to open a Roth IRA and what it costs

You can open a Roth IRA at almost any bank, credit union, brokerage firm, or investment company. Common places include Vanguard, Fidelity, Charles Schwab, Merrill Edge, and many others. Some banks and credit unions offer Roth IRAs as well, though they typically limit you to savings accounts or CDs rather than stocks and mutual funds.

There is no federal fee to open or maintain a Roth IRA. Some institutions charge annual account maintenance fees (often $10 to $25), though many waive the fee if you maintain a minimum balance or set up automatic contributions. You may also pay investment fees—for example, if you buy mutual funds or exchange-traded funds (ETFs), those funds charge their own expense ratios. These costs vary widely depending on what you invest in, so compare options before you choose.

Roth IRA versus other retirement accounts

A Roth IRA is one of several ways to save for retirement. A traditional IRA lets you deduct contributions now and pay taxes later. A 401(k) is an employer-sponsored plan where contributions come out of your paycheck before taxes, and you pay taxes on withdrawals in retirement. A SEP IRA or Solo 401(k) is for self-employed people and small business owners.

The Roth IRA is best if you expect to be in a higher tax bracket in retirement, or if you want the flexibility of withdrawing contributions anytime without penalty. It is also useful if you want to pass tax-assistance programs to heirs. A traditional IRA or 401(k) makes more sense if you need a tax deduction now and expect to be in a lower tax bracket in retirement. Many people use both—a Roth for some savings and a traditional account for others, depending on their situation.

Frequently Asked Questions

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

Yes, you can have both accounts at the same time. However, your total contributions across all IRAs (Roth and traditional combined) cannot exceed the annual 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.

What happens to my Roth IRA if I die?

Your beneficiaries inherit the account and can withdraw the money. They must take distributions according to IRS rules, but the tax-free status of the money carries forward. A spouse can roll the account into their own Roth IRA, while non-spouse beneficiaries must withdraw the balance within 10 years.

Can I withdraw money from my Roth IRA to buy a house?

You can withdraw your contributions anytime without penalty. If you are a first-time homebuyer, you can also withdraw up to $10,000 in earnings penalty-free (though you still pay income tax on the earnings). You must have opened the account at least five years before the withdrawal.

What if my income goes up after I contribute to a Roth IRA?

Your income does not matter after you contribute. Once the money is in the account, it stays there regardless of how much you earn later. Income limits only affect whether you can make new contributions in future years.

Is a Roth IRA the same as a Roth 401(k)?

No. A Roth 401(k) is an employer-sponsored plan, while a Roth IRA is an individual account you open yourself. A Roth 401(k) has higher contribution limits and required minimum distributions at age 73, while a Roth IRA has lower limits and no required withdrawals. They have the same tax-free withdrawal benefit.