A Roth IRA is a retirement savings account where you contribute after-tax money and withdraw it tax-free in retirement

A Roth IRA is an individual retirement account that the IRS created in 1997. You put money into it with dollars you've already paid income tax on. The account grows over time, and when you reach retirement age, you pull money out without paying tax on the growth or the withdrawals. That's the core trade-off: you pay tax now, not later.

The account itself is just a container—like a bucket—that holds investments. You decide what goes inside: stocks, bonds, mutual funds, exchange-traded funds (ETFs), or even cash. The investments grow, and the IRS doesn't tax that growth as long as the money stays in the account. Once you hit age 59½ and have held the account for at least five years, you can withdraw as much as you want without owing federal income tax.

You open a Roth IRA through a bank, brokerage firm, or investment company. Common places include Vanguard, Fidelity, Charles Schwab, and your own bank. Each institution holds the account and processes your deposits and withdrawals, but the rules are the same everywhere—they come from the IRS, not from the company.

Key Takeaways

  • You fund a Roth IRA with after-tax money, meaning you've already paid income tax on the dollars you deposit.
  • All growth and withdrawals in retirement are tax-free, as long as you're at least 59½ and have held the account for five years.
  • You choose what investments go inside the account—stocks, bonds, funds, or cash—and the account grows based on how those investments perform.
  • Annual contribution limits exist: for 2024, you can deposit up to $7,000 per year (or $8,000 if you're 50 or older), and income limits determine whether you can contribute at all.
  • Unlike a traditional IRA, you don't get a tax deduction for Roth contributions, but you also don't have to take withdrawals at any age.

How a Roth IRA differs from a traditional IRA

The main difference is when you pay tax. With a traditional IRA, you contribute pre-tax money (you get a tax deduction that year), the account grows tax-free, and then you pay income tax on everything you withdraw in retirement. With a Roth IRA, you contribute after-tax money (no deduction), the account grows tax-free, and withdrawals in retirement are tax-free.

A second difference is required withdrawals. Once you turn 73, the IRS requires you to withdraw a minimum amount from a traditional IRA each year, whether you need the money or not. With a Roth IRA, there is no such requirement during your lifetime. You can leave the money untouched and let it grow as long as you live.

A third difference is income limits. Anyone with earned income can open a traditional IRA and contribute to it. Roth IRAs have income limits—if you earn above a certain threshold, you cannot contribute directly. For 2024, the limit phases out starting at $146,000 for single filers and $230,000 for married couples filing jointly, but these numbers change each year.

What types of investments can go inside a Roth IRA

Once you open the account, you can invest in almost anything the brokerage or bank offers. Most people hold stocks (individual shares or through mutual funds), bonds, ETFs, or a mix of all three. Some people keep cash in their Roth IRA if they're not ready to invest or want to hold money for an emergency.

A few investments are off-limits: you cannot hold life insurance, collectibles (art, coins, stamps), or certain precious metals inside a Roth IRA. Your brokerage will tell you what's allowed when you open the account. The key point is that whatever you hold grows without triggering annual tax bills—that's the shelter the account provides.

Income limits and who can contribute

You must have earned income to contribute to a Roth IRA—that means wages from a job, self-employment income, or other compensation reported to the IRS. You cannot contribute if your only income is from investments or Social Security.

The IRS also sets income limits based on your filing status. For 2024, single filers can contribute the full amount if their modified adjusted gross income (MAGI) is below $146,000. The contribution amount phases out between $146,000 and $161,000, and you cannot contribute at all above $161,000. For married couples filing jointly, the phase-out range is $230,000 to $240,000. These limits change each year, so check the IRS website or your brokerage for the current year's numbers.

If your income exceeds the limit, you have options: you can use a backdoor Roth (contributing to a traditional IRA and converting it to a Roth), or you can simply wait until your income drops below the threshold. Some people also use a spousal Roth IRA if one spouse has no earned income but the other does.

Annual contribution limits and catch-up contributions

For 2024, you can deposit up to $7,000 per year into a Roth IRA. If you're 50 or older, you can add an extra $1,000 per year (called a catch-up contribution), bringing your total to $8,000. These limits apply across all IRAs you own—if you have both a Roth and a traditional IRA, your combined contributions cannot exceed the annual limit.

The limit changes most years based on inflation. The IRS announces the new limit in October for the following year. You can contribute for the current year until the tax filing deadline (usually April 15 of the following year), so you have until April 2025 to make a 2024 contribution.

When you can withdraw money without penalty

The general rule is that you can withdraw your contributions (the money you put in) at any time without penalty or tax. You can also withdraw earnings (the growth) penalty-free if you're at least 59½ and have held the account for at least five years. If you withdraw earnings before 59½, you'll owe a 10% penalty plus income tax on the earnings.

There are a few exceptions to the early withdrawal penalty: you can withdraw up to $10,000 for a first-time home purchase, up to $35,000 for certain may have access to education expenses (if you've held the account for at least five years), or for certain medical expenses and disability situations. These exceptions are narrow, so check the IRS rules or ask your brokerage before assuming you may have access to.

Why people choose a Roth IRA

The main reason is tax-free growth and withdrawals. If you believe your tax rate will be higher in retirement, or if you want to avoid tax bills in retirement, a Roth makes sense. You pay tax now at your current rate, and then everything grows and comes out tax-free.

A second reason is flexibility. You can withdraw your contributions anytime without penalty, so it acts as a backup emergency fund if you need it. You also don't have to take withdrawals in retirement, so you can let the money grow as long as you live and pass it to heirs.

A third reason is no income tax on withdrawals. In retirement, a large Roth withdrawal won't push you into a higher tax bracket or affect your Medicare premiums or tax on Social Security—things that can happen with traditional IRA withdrawals. This can matter a lot if you're managing multiple income sources in retirement.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can own both. However, your combined contributions across all IRAs cannot exceed the annual limit ($7,000 for 2024, or $8,000 if you're 50+). If you contribute $4,000 to a Roth, you can only contribute $3,000 to a traditional IRA that year.

What happens to my Roth IRA if I die?

Your heirs inherit the account. They must withdraw the money within a set timeframe (usually 10 years, depending on their relationship to you and when you opened the account). The withdrawals are tax-free to them because the money was already taxed when you contributed it. Your brokerage will guide your heirs through the process.

Can I convert a traditional IRA to a Roth IRA?

Yes, this is called a Roth conversion. You move money from a traditional IRA to a Roth IRA, and you owe income tax on the amount converted that year. There are no income limits on conversions, so this is how people with high incomes fund a Roth (the backdoor Roth strategy). Consult a tax professional before converting, because the tax bill can be substantial.

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

You can keep it in cash if you want. Some people deposit money and hold it until they're ready to invest, or they keep a portion in cash for emergencies. However, cash earns little to no interest, so most people invest at least part of their Roth to take advantage of growth over time.

What if my employer offers a Roth 401(k)—is that the same as a Roth IRA?

No, they're different accounts with different rules. A Roth 401(k) is through your employer, has much higher contribution limits, and requires withdrawals starting at age 73. A Roth IRA is individual, has lower limits, and has no required withdrawals. You can have both if your employer offers a 401(k) and you meet the income requirements for a Roth IRA.