What is a Roth IRA
A Roth IRA is an individual retirement account funded with after-tax dollars, where your investments grow tax-free and qualified withdrawals in retirement are completely tax-free.
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that you open and fund independently — not through an employer. Contributions are made with after-tax money, meaning you don't get a tax deduction when you contribute. The benefit comes later: all investment growth inside the account is tax-free, and qualified withdrawals in retirement are also completely tax-free.
Established by the Taxpayer Relief Act of 1997 and named after Senator William Roth, the Roth IRA has become one of the most popular retirement vehicles in America — particularly for younger workers who expect their income (and tax rate) to be higher in retirement than it is today.
How a Roth IRA Works
- You contribute after-tax dollars (money you've already paid income tax on)
- The money is invested in stocks, bonds, index funds, ETFs, or other eligible assets
- The account grows tax-free — no annual taxes on dividends, interest, or capital gains
- In retirement (age 59½ or older, with the account open at least 5 years), you withdraw funds completely tax-free
Contribution Limits (2025)
| Age | Annual Contribution Limit |
|---|---|
| Under 50 | $7,000 |
| 50 or older | $8,000 |
Note: You can contribute to both a Roth IRA and a 401(k) in the same year — the limits are separate.
Income Limits
Not everyone can contribute directly to a Roth IRA. For 2025, the ability to contribute phases out at:
- Single filers: $150,000–$165,000 MAGI
- Married filing jointly: $236,000–$246,000 MAGI
Above those thresholds, direct contributions aren't allowed. Higher earners sometimes use a strategy called the backdoor Roth IRA (contribute to a Traditional IRA and then convert it) to get around this limitation. Separately, anyone with existing pre-tax retirement savings can move funds with a Roth IRA conversion — paying taxes now to secure tax-free growth going forward.
Roth IRA vs. Traditional IRA
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Contributions | After-tax | Pre-tax (may be deductible) |
| Growth | Tax-free | Tax-deferred |
| Withdrawals | Tax-free | Taxed as income |
| RMDs (Required Minimum Distributions) | None | Start at age 73 |
| Best for | Lower tax rate now than in retirement | Higher tax rate now than in retirement |
The absence of required minimum distributions (RMDs) is a significant advantage of the Roth IRA — a Traditional IRA requires you to begin withdrawing funds at 73, but a Roth IRA lets the money continue compounding for as long as you live.
Roth IRA Withdrawal Rules
- Contributions (the money you put in, not earnings) can be withdrawn at any time, tax and penalty free
- Earnings must stay in the account until age 59½ and the 5-year rule is met to avoid taxes and penalties
- This makes the Roth IRA slightly more flexible than a 401(k) in genuine emergencies, though it's still best practice not to touch retirement accounts early
What to Invest In
A Roth IRA is just the account — you still need to choose investments inside it. For most people, a simple portfolio of one or two low-cost index funds (such as a total market fund and an international fund) is effective and inexpensive. Fidelity and Charles Schwab offer Roth IRA accounts with no account minimums and access to zero-expense-ratio index funds.
The Case for Starting a Roth IRA Early
The combination of tax-free growth and compound interest makes the Roth IRA extraordinarily valuable when started young. A 22-year-old who contributes $7,000 per year and earns an average 8% return could have well over $2 million in the account by age 65 — entirely tax-free.