What Is a Roth IRA? How It Works, Contribution Limits & Tax Benefits

A Roth IRA is an individual retirement account that you contribute to with money you've already paid income tax on. Unlike a traditional IRA, you don't get a tax deduction today—but every dollar of growth and every withdrawal in retirement is tax-free.

You open a Roth IRA at a brokerage, bank or robo-advisor. You contribute cash, then invest that cash in stocks, bonds, index funds, ETFs or other securities.

The IRS sets annual contribution limits. For 2026, you can contribute up to $7,000 if you're under 50, or $8,000 if you're 50 or older (the extra $1,000 is a catch-up contribution).

For 2026, the limit rises to $7,500 under age 50 and $8,500 at 50+, adjusted for inflation.

You must have earned income (wages, salary, self-employment income) to contribute to a Roth IRA. Investment income doesn't count.

The IRS also imposes income phase-out ranges. If your modified adjusted gross income (MAGI) is too high, your contribution limit shrinks or disappears entirely.

• Single filers: phase-out starts at $150,000 MAGI; completely phased out at $165,000.
• Married filing jointly: phase-out starts at $236,000 MAGI; completely phased out at $246,000.

If you earn above the limit, you can still use a backdoor Roth IRA: contribute to a traditional IRA (which has no income limit for contributions), then convert it to a Roth IRA and pay tax on any gains. This is a legal workaround.

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The decision between a Roth IRA and a traditional IRA turns on when you pay income tax.

Roth IRA: contributions are never deductible. Qualified withdrawals are completely tax-free.

If you expect your tax rate to be higher in retirement than it is now—common for young earners or those with decades of compounding ahead—a Roth IRA is usually worth it. If you need the deduction today to lower your taxable income, the traditional IRA can make sense.

You can withdraw your original contributions at any time, tax-free and penalty-free, because you already paid tax on that money.

To withdraw earnings tax-free and penalty-free, you must meet two tests:

1. 1You are at least 59½ years old.
2. 2The account has been open for at least five years (the "five-year rule").

Required minimum distributions (RMDs) never apply to Roth IRAs during your lifetime—another advantage over traditional IRAs, which force withdrawals starting at age 73.

The power of a Roth IRA is compounding without tax drag. Every dividend, every capital gain, every dollar of growth stays in the account and keeps working for you.

Over decades, avoiding tax on compounding can add hundreds of thousands of dollars to your retirement balance.

For broader strategies on building wealth and managing taxes, visit our [Money and Debt](/money-and-debt) section.

• Stocks (individual companies)
• Bonds (government or corporate)
• Mutual funds (actively managed pools)
• Index funds (passively managed, low-cost)
• ETFs (exchange-traded funds)

You cannot hold life insurance or collectibles (art, coins, antiques) in a Roth IRA.

Most long-term investors choose low-cost index funds that track the S&P 500 or total stock market. These offer broad diversification, minimal fees (often 0.03–0.10% expense ratio) and historically strong returns.

Not investing the cash. Opening the account and transferring money is step one. If you leave cash sitting uninvested, you earn nothing.

Withdrawing earnings early. Remember: contributions come out anytime, but earnings trigger tax and penalty if you're under 59½ and haven't held the account five years.

Assuming you can't contribute if you have a 401(k). You can contribute to both a Roth IRA and a workplace 401(k) in the same year, subject to separate limits. The 401(k) limit for 2026 is $23,000 ($30,500 if 50+).

Forgetting to name a beneficiary. If you die without a beneficiary on file, the account goes through probate. Name a primary and contingent beneficiary when you open the account.

A Roth IRA is worth it if:

• You expect your tax rate in retirement to be the same or higher than today.
• You're young and have decades for tax-free compounding.
• You want flexibility—access to contributions without penalty, no RMDs, tax-free inheritance for heirs.
• You're already maxing out a traditional 401(k) and want additional tax-diversified retirement savings.

A Roth IRA may be less compelling if you need the upfront tax deduction to lower your current taxable income, or if you expect to be in a much lower tax bracket in retirement.

Use a Roth IRA calculator to project how much your contributions will grow over time. Input your current age, retirement age, annual contribution and expected rate of return.

You'll find free spreadsheets and financial planning templates in our [Free Tools](/free-tools) library.

Roth IRA contributions do not reduce your taxable income in the year you make them. If you earn $60,000 and contribute $7,000 to a Roth IRA, your taxable income is still $60,000.

You report Roth IRA contributions on your tax return only if you're claiming the Saver's Credit (a credit for low- and moderate-income taxpayers who save for retirement). The credit is worth 10%, 20% or 50% of your contribution, up to $2,000 per person, depending on your adjusted gross income.

What is a Roth IRA in simple terms?

A Roth IRA is a retirement savings account funded with after-tax dollars. Your money grows tax-free, and you pay zero tax on withdrawals in retirement.

Can I withdraw money from my Roth IRA anytime?

You can withdraw your original contributions anytime without tax or penalty. To withdraw earnings tax-free, you must be 59½ or older and the account must have been open at least five years.

What is the Roth IRA contribution limit for 2026?

What is the income limit for a Roth IRA?

For 2026, single filers can contribute fully if their MAGI is below $150,000; the contribution phases out between $150,000 and $165,000. Married couples filing jointly phase out between $236,000 and $246,000.

How is a Roth IRA different from a 401(k)?

A 401(k) is an employer-sponsored plan with higher contribution limits ($23,000 in 2026) and often includes an employer match. A Roth IRA is an individual account with a $7,000 limit and no employer involvement.

Opening a Roth IRA is one of the simplest, most powerful moves you can make for long-term wealth. Start early, contribute consistently and let decades of tax-free compounding do the heavy lifting.