Saving for retirement may feel like a far-off goal, but the earlier you start, the more you can benefit from compound growth. So, what is a Roth IRA (Individual Retirement Account)? It’s a valuable investment tool to help you build your nest egg over time.
Unlike other retirement accounts, a Roth IRA allows you to pay taxes upfront. (Another way to say that: You fund your Roth IRA account with after-tax dollars.) This means you can withdraw your investments tax-free when you retire.
In this article, we’ll break down everything you need to know—from the basics of opening an account to understanding withdrawal rules—offering expert insights to help you make confident, informed decisions about your retirement.
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What is a Roth IRA?
A Roth IRA is a tax-advantaged account for retirement that lets you contribute after-tax dollars—meaning you pay taxes on your money upfront, but then you can withdraw that money (plus earnings!) tax-free in retirement.
“The beauty of a Roth IRA is that all the growth and earnings—whether from interest, dividends, or stock gains—aren’t taxed when you take them out,” says Arron Bennett, CFO and founder of Bennett Financials.
There are a few caveats. For starters, not everyone can open a Roth IRA. There are income limits. Plus, there are specific rules governing when and how you can withdraw the money. We'll explore these rules further to help you understand whether a Roth IRA is right for you and how to make the most of it.
How does a Roth IRA work?
To assess whether a Roth IRA is the right retirement plan for you, you’ll need to consider eligibility limits, contribution limits, and withdrawal rules.
Eligibility and contribution limits
For the 2025 tax year, the Internal Revenue Service (IRS) has set the following limits on eligibility and contributions
Eligibility (income limits)
Individuals and married couples who make over a certain amount of yearly income may have their contributions capped, or may not even be eligible to open a Roth IRA at all.
- Single filers: If your MAGI (Modified Adjusted Gross Income) is under $150,000 you can contribute fully to a Roth IRA. If your MAGI is between $150,000 and $165,000 you can contribute a reduced amount. If your income is over $165,000, you’re ineligible to open a Roth IRA.
- Married couples filing jointly: If your MAGI is under $225,000 you can contribute fully; if it’s between $225,000 and $240,000 you can make a reduced contribution; if it’s over $240,000 you’re ineligible to open a Roth IRA.
Contribution limits
- If you’re under 50 years old: You can contribute up to $7,000 annually.
- If you’re 50 years old and above: You can contribute up to $8,000, which includes a $1,000 “catch-up” contribution.
It's worth noting that these limits are subject to change annually due to inflation adjustments. It's always a good idea to consult the latest IRS requirements and/or speak with your financial advisor to optimize your retirement savings strategy.
Roth IRA withdrawal rules
- Contributions: You can withdraw the money you’ve contributed to your Roth IRA at any time, at any age—it will be tax-free and penalty-free.
- Earnings: To withdraw your earnings tax-free, you must be at least 59½ years old and the Roth IRA account needs to have been open for at least five years. “Withdrawing before meeting these requirements may result in taxes and a 10% early withdrawal penalty,” Gammon says, unless qualifying exceptions apply.
- Exceptions: Certain situations allow for early withdrawals of earnings without the penalty. These include first-time home purchases, qualified education expenses, and certain medical expenses.
Benefits of a Roth IRA
When it comes to retirement savings, a Roth IRA offers some unique advantages that can make a big difference in your long-term financial strategy. Here are the key benefits of this powerful retirement tool.
Tax-free growth and withdrawals
The main benefit of a Roth IRA is that both the growth of your investments and withdrawals in retirement are tax-free. “The Roth IRA is beneficial as a tax strategy, particularly if you’re in a low tax bracket now but expect to be in a higher one in the future,” says Chad Gammon, CFP and owner of Custom Fit Financial.
Flexibility in withdrawals
One of the most appealing features of a Roth IRA is the ability to withdraw your contributions (but not earnings) at any time.
No Required Minimum Distributions (RMDs)
Unlike other retirement accounts like a 401(k), which require you to start withdrawing money at a certain age, a Roth IRA has no RMDs (Required Minimum Distributions). This can be particularly beneficial for those who want to keep their money invested longer or pass it on to heirs.
Control over investment choices
With a Roth IRA, you have complete control over your investments, unlike 401(k)s that often limit you to employer-selected options. This flexibility allows you to choose investments with lower fees and better growth potential.
Estate planning benefits
Another advantage of a Roth IRA is its usefulness in estate planning. Since there are no taxes on withdrawals, Roth IRAs can be passed on to heirs tax-free, which can be a valuable way to leave a legacy.
Roth IRA vs traditional IRA: Key differences
The main distinction between a Roth IRA and a traditional IRA lies in the timing of taxes. With a traditional IRA, you get a tax break on contributions today, but you’ll owe taxes when you withdraw funds in retirement. On the other hand, a Roth IRA requires you to pay taxes on your contributions upfront, but your money grows and is withdrawn tax-free in retirement.
Which is best? There is no one-size-fits-all answer, it depends on your current and future tax situation.
Is a Roth IRA right for you?
Not sure if a Roth IRA is the right fit for your retirement savings? Consider these questions:
Will your tax bracket change?
“If you expect to be in a higher tax bracket when you retire, a Roth IRA could be a good fit,” Bennett says. “Locking in today’s tax rate with a Roth makes a lot of sense.” On the other hand, “if you’re currently in a high tax bracket but expect to be in a lower one later, a traditional IRA or 401(k) might be better for you.”
Do you want flexibility when it comes to accessing your money?
A Roth IRA offers more control over your savings. “It doesn't require minimum distributions (RMDs), so you can let your money grow,” Bennett says. “You can leave it in there for as long as you'd like.”
Are you planning to pass on wealth?
“A Roth IRA can also be a strong option for estate planning,” Bennett says. “Since withdrawals are tax-free, it allows you to pass on your savings to heirs without them incurring taxes.” A Roth IRA is a great option if you believe you are in a lower tax bracket now than in the future.
Ultimately, whether a Roth IRA is right for you depends on your goals and future expectations. Consulting a financial advisor can help guide your decision and make sure you’re on the right track.
How to open a Roth IRA (and manage it)
Opening a Roth IRA is simple and can be done in a few steps. Start by selecting a provider, such as a bank, brokerage, or robo-advisor, and complete their application process to open your account.
Once your Roth IRA is set up, you can start contributing up to the annual limit. Be sure to regularly check your account to ensure your investments are on track to meet your retirement goals. It’s a good idea to review your account at least once a year and adjust if needed.
Investment strategies for Roth IRAs
With a Roth IRA, a range of investment options is available, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The goal is to pick investments that will grow over time, taking advantage of the tax-free growth that a Roth IRA offers.
- Long-term growth with stocks: If you're younger and have more time until retirement, investing in stocks can be a good strategy. Stocks tend to have higher growth potential over the long term, meaning they could grow significantly while benefiting from the tax-free growth in your Roth IRA.
- Shifting to more conservative options: As you approach retirement, consider gradually adding more conservative investments, like bonds or low-risk funds, to protect the savings you've built up. This helps reduce the risk of market fluctuations as you get closer to needing the funds.
Plan smarter, retire better
A Roth IRA offers powerful benefits, including tax-free growth, flexibility in withdrawals, and no required minimum distributions, making it a great option for retirement savings. While it’s not the best fit for everyone, especially depending on your current and future tax situation, it provides a unique opportunity to maximize your savings. Whether you’re just starting your retirement journey or looking to optimize your existing strategy, the Roth IRA can be a key tool in building wealth for your future.
FAQs
How do you make money on a Roth IRA?
Money is made in a Roth IRA by investing the funds you contribute in various assets, such as stocks, bonds, mutual funds, and ETFs. Over time, the investments grow, and the best part is that the earnings, including dividends and capital gains, accumulate tax-free. When it’s time to retire, you can withdraw both your contributions and the earnings tax-free, provided you meet the requirements (being at least 59½ years old and having the account open for at least five years).
What is better, a 401k or a Roth IRA?
The choice between a 401(k) and a Roth IRA depends on your financial situation and goals. A 401(k) offers higher contribution limits and employer matching, but taxes are due upon withdrawal. A Roth IRA provides tax-free growth and withdrawals, though it has lower contribution limits and income restrictions. Many people use both to diversify their retirement savings.
What is a Roth IRA withdrawal?
A Roth IRA withdrawal refers to taking money out of your Roth IRA account. The rules for withdrawals depend on whether you're withdrawing contributions or earnings. You can access the money you've contributed at any time without paying taxes or penalties. To qualify for a tax-free and penalty-free withdrawal of earnings, you must be at least 59½ years old and have had your Roth IRA for at least five years. Otherwise, you may face taxes and a 10% early withdrawal penalty.
Certain situations, such as buying your first home, paying for qualified education expenses, or covering eligible medical costs, may allow you to withdraw earnings early without penalties.
What are the disadvantages of a Roth IRA?
Contributions are made with after-tax dollars, so you don’t receive the immediate tax deduction that you get with a traditional IRA or 401(k). Additionally, there are income limits for eligibility, meaning if your income is too high, you may not be able to contribute directly to a Roth IRA. Also, if you withdraw your earnings before age 59½ and before meeting the five-year rule, you may face taxes and penalties, reducing the flexibility of your retirement savings.