Roth IRA

A Roth IRA is a retirement account where you contribute after-tax income and receive no immediate tax deduction. In return, the account grows tax-free and all withdrawals in retirement are tax-free, with no required minimum distributions.

How it works

You contribute after-tax income to a Roth IRA — no tax deduction now. The money grows, tax-free. When you withdraw in retirement (age 59½+), you pay no taxes on the withdrawn amount. This is the inverse of a traditional IRA: no tax break now, but complete tax shelter later.

For example: you contribute $7,000 in after-tax income to a Roth. You do not deduct it on your taxes. Over 30 years, it grows to $60,000. At retirement, you withdraw $60,000, tax-free. A traditional IRA contributor would owe taxes on the entire $60,000 withdrawal.

Income limits

You can contribute to a Roth IRA only if your modified adjusted gross income (MAGI) is below a threshold. For 2024, the limit is $146,000 for single filers and $230,000 for married filing jointly. Above those limits, your contribution phases out, and above $161,000/$240,000, it is eliminated entirely.

This creates a problem for high earners: they are phased out of direct Roth contributions but may want Roth accounts. This is solved by backdoor Roth contributions.

Key differences from traditional IRA

Tax treatment: Traditional defers taxes now, Roth defers taxes never (you pay them upfront).

Withdrawals: Traditional withdrawals are fully taxable. Roth withdrawals are tax-free.

Required minimum distributions (RMD): Traditional IRAs require you to withdraw starting at age 73. Roth IRAs have no RMD during your lifetime (though beneficiaries may have RMDs).

Flexibility: With a Roth, you can withdraw your contributions anytime, penalty-free. With a traditional, any withdrawal triggers the 10% penalty if before 59½ (with exceptions).

Age limit: You can contribute to a traditional IRA indefinitely, even after age 73. You can contribute to a Roth only if you have earned income (no age limit on contribution, but contribution must not exceed earned income).

Roth advantages

Tax-free growth. Over decades, tax-free compound interest is powerful. If you expect high tax rates in retirement, a Roth locks in today’s rates.

No RMD. You can let the account grow indefinitely without forced withdrawals, allowing you to pass wealth to heirs.

Flexible contributions. You can withdraw contributions (not earnings) before 59½ without penalty or taxes.

Strategic flexibility. Roth conversions allow you to move traditional IRA money to Roth in low-income years.

When to choose Roth over traditional

You are in a low tax bracket now. You do not mind forgoing the deduction because your tax rate is low.

You expect to be in a higher bracket in retirement. If you earn $50,000 now (22% bracket) and expect to have $100,000+ in retirement withdrawals, you may be in a higher bracket then. Paying 22% now (Roth) beats paying 24% or 32% later.

You want tax diversification. Having both traditional and Roth accounts gives you flexibility to manage tax liability in any given year.

You have a long time horizon. The longer the account grows tax-free, the more valuable the Roth becomes.

Investment choices

Like other IRAs, a Roth holds investments you choose: index funds, stocks, bonds, mutual funds, etc.

See also