Money fundamentals · Growth
Roth IRA basics: pay taxes now, grow for later.
A Roth IRA is an individual retirement account with a twist: you contribute money you’ve already paid taxes on, and qualified withdrawals in retirement can come out tax-free. For many families, that makes it one of the most useful tools in the growth layer of their financial house.
How a Roth IRA works
With a traditional IRA, contributions may be tax-deductible now and withdrawals are taxed later. A Roth flips that. Contributions aren’t deductible, but earnings can grow and come out tax-free in retirement if you meet the rules for a qualified withdrawal.
The key rules to know
- You need earned income to contribute, and you can’t contribute more than you earned for the year.
- The IRS sets an annual contribution limit, with an extra catch-up amount allowed at age 50 and older. Limits are adjusted periodically.
- Income limits apply. Above certain income levels, how much you can contribute is reduced or phased out.
- Qualified withdrawals of earnings generally require the account to be open at least five years and that you be 59½ or meet another qualifying condition.
- Your own contributions can generally be withdrawn at any time without tax or penalty; earnings follow stricter rules.
- No required minimum distributions during the original owner’s lifetime.
For the current year’s exact limits, see IRS.gov or ask a tax professional.
Who a Roth can make sense for
A Roth is often attractive for people who expect to be in a similar or higher tax bracket later, including many young workers early in their careers. It can also be a way for a teen or young adult with earned income to start building retirement savings with decades of runway.
Roth or traditional?
The answer depends on your income, tax situation and goals, and some people use both. Because taxes are involved, it’s worth getting guidance from a qualified tax professional for your situation.
The short version
- Contributions are made with after-tax money.
- Qualified withdrawals of earnings can be tax-free.
- You need earned income, and IRS limits apply.
- Your own contributions can generally be withdrawn anytime.
- Check IRS.gov for current-year limits.
Common questions
Can I have a Roth IRA and a 401(k)?
Yes, in many cases. Income limits for the Roth still apply, and annual IRA limits are separate from workplace plan limits.
Can my teenager open a Roth IRA?
If they have earned income from real work, a custodial Roth IRA may be an option. Allowance and gifts don’t count as earned income.
Mike does not provide tax, legal or accounting advice. For guidance on your own situation, talk with a qualified tax professional or attorney.
Withdrawals of earnings before age 59½ that don’t meet the qualified-distribution rules may be subject to income tax and an additional tax penalty. All investments involve risk, including possible loss of principal.
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