A Roth IRA is a retirement savings account where you pay taxes now and withdraw money tax-free later

A Roth IRA is a type of individual retirement account. You put money into it, that money grows over time through investments, and when you reach retirement age, you can take the money out without paying taxes on the growth. The trade-off is that you contribute money that has already been taxed — you don't get a tax break when you deposit it, the way you do with some other retirement accounts.

The name comes from Senator William Roth, who sponsored the legislation that created this account type in 1997. It's offered by banks, credit unions, and investment firms. There's no single "Roth IRA" — you open one through a specific financial institution, the same way you'd open a checking account.

Key Takeaways

  • You contribute money that you've already paid income tax on, so deposits don't reduce your taxable income for the year.
  • The money grows inside the account without being taxed each year, and you pay no taxes when you withdraw it in retirement.
  • You can withdraw your contributions (the money you put in) at any time without penalty, but earnings (the growth) have age and holding-period rules.
  • For 2024, you can contribute up to $7,000 per year if you're under 50, or $8,000 if you're 50 or older, but only if you have earned income.
  • You cannot contribute to a Roth IRA if your income is above certain limits, which change each year based on your filing status.

How money grows inside a Roth IRA

When you open a Roth IRA, you choose how to invest the money — typically through stocks, bonds, mutual funds, or a mix of these. Whatever you choose, any gains (profit from price increases or dividends) are not taxed each year the way they would be in a regular investment account. This is called tax-deferred growth.

For example, if you invest $5,000 and it grows to $7,000 over five years, you don't owe taxes on that $2,000 gain while it's sitting in the account. In a regular taxable investment account, you might owe taxes on dividends or capital gains each year. In a Roth IRA, the growth compounds without that annual tax drag.

The difference between contributions and earnings

A Roth IRA treats the money you put in (your contributions) differently from the money your investments make (your earnings). This distinction matters for withdrawals.

You can withdraw your contributions at any time, at any age, without taxes or penalties. If you put in $7,000 and it grows to $9,000, you can pull out that original $7,000 whenever you need it. The $2,000 in earnings, however, has rules: you generally cannot withdraw earnings without taxes and a 10 percent penalty unless you're 59½ years old and have held the account for at least five years.

This is one reason people sometimes use a Roth IRA as a backup emergency fund — the contributions are always accessible. But the account is designed for retirement, and using it for non-retirement purposes defeats the tax advantage.

Income limits and who can open one

You can only contribute to a Roth IRA if you have earned income — money from a job, self-employment, or freelance work. You cannot contribute if your only income is from investments, Social Security, or pensions.

There are also income limits. If you earn above a certain amount, you cannot contribute the full $7,000 (or $8,000 if you're 50+), and above a higher threshold, you cannot contribute at all. These limits change each year. For 2024, the limits depend on whether you file taxes as single, married filing jointly, or another status. You can find the current year's limits on the IRS website or ask your financial institution.

Unlike some other retirement accounts, there is no age limit on contributions — you can contribute to a Roth IRA as long as you have earned income, even after age 70.

Roth IRA versus traditional IRA

The main difference between a Roth IRA and a traditional IRA is when you pay taxes. With a traditional IRA, you may deduct your contributions from your income in the year you make them, which lowers your taxable income. But when you withdraw the money in retirement, you pay taxes on the full amount.

With a Roth IRA, you get no deduction now, but withdrawals in retirement are tax-free. Which one makes sense depends on whether you expect to be in a higher or lower tax bracket in retirement — a question that's hard to answer. Many people use both types of accounts to spread the tax risk.

A traditional IRA also requires you to start taking withdrawals at age 73 (as of 2023, under current law). A Roth IRA has no such requirement during your lifetime, which is another reason some people prefer it.

What happens when you reach retirement age

You can withdraw from your Roth IRA without penalty starting at age 59½, as long as you've held the account for at least five years. The five-year rule applies to each Roth IRA separately — if you open a second one later, that one has its own five-year clock.

Unlike a traditional IRA, you don't have to take withdrawals at a specific age. You can leave the money in the account to keep growing, or withdraw as much or as little as you want, whenever you want. This flexibility is useful if you don't need the money right away or want to pass it to heirs.

If you withdraw earnings before age 59½ or before the five-year holding period ends, you'll owe income tax on those earnings plus a 10 percent penalty. There are some exceptions — for example, if you're a first-time homebuyer, you can withdraw up to $10,000 in lifetime earnings without the penalty (though you still owe income tax).

Why someone might choose a Roth IRA

People choose Roth IRAs for several reasons. If you're young and expect your income to be higher in retirement, a Roth locks in today's lower tax rate. If you want flexibility — the ability to withdraw contributions without penalty or to leave money untouched — a Roth offers that. If you want to leave money to heirs without them facing a large tax bill, a Roth is efficient because withdrawals are tax-free.

A Roth also works well if you're self-employed or have variable income, because you only contribute in years when you have earned income. There's no pressure to fund it every year.

Frequently Asked Questions

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

Yes. However, your total contributions to both accounts in a single year cannot exceed the annual limit ($7,000 in 2024 if you're under 50). If you contribute $4,000 to a Roth, you can only contribute $3,000 to a traditional IRA that year. You can split the money however you want between them, but the combined total is the cap.

What if I need money before retirement?

You can withdraw your contributions anytime without taxes or penalties. If you need to withdraw earnings before age 59½, you'll owe income tax on those earnings plus a 10 percent penalty, unless an exception applies (such as a first-time home purchase, up to $10,000 lifetime). Contributions are always penalty-free.

Do I have to invest the money, or can I just keep it in cash?

You can keep cash in a Roth IRA, but it won't grow. Most people invest it in stocks, bonds, or mutual funds so the money compounds over time. Ask your financial institution what investment options they offer.

What happens to my Roth IRA when I die?

Your heirs inherit the account. They can withdraw the money, but the rules depend on their relationship to you and when the account was opened. Spouses have more flexibility than other heirs. The money itself is not subject to income tax when inherited, though earnings withdrawn by non-spouse heirs may be taxed.

Can I convert a traditional IRA to a Roth IRA?

Yes, through a process called a Roth conversion. You move money from a traditional IRA to a Roth IRA, and you pay income tax on the amount converted in that tax year. This can make sense if you expect tax rates to rise or if you want to lock in a lower rate now. Consult a tax professional before converting.