What is a Roth IRA?

A Roth IRA is an individual retirement account (IRA) that you contribute to after paying taxes. Since you’ve already paid taxes on the money you put in, investment earnings and eventual withdrawals are tax-free as long as you satisfy IRS requirements. It’s named a Roth IRA after William Roth, the U.S. Senator who created it. 

What you’ll learn:

• A Roth IRA is a retirement savings account that can bring you tax-free growth.

• A Roth IRA is funded with post-tax money, as opposed to a traditional IRA, which is funded with pre-tax money.

• Investment earnings from the Roth IRA can be withdrawn tax-free after age 59 ½ and if you’ve held the IRA at least five years. But your contributions can be withdrawn tax-free anytime.

• There are income and contribution limits on Roth IRAs that limit who may benefit from one.

A Roth IRA can help your retirement savings grow tax-free. Here’s how it works:

• Opening: Set up a Roth IRA through your bank, a brokerage firm, mutual fund company, insurance company or other financial institution that offers retirement accounts.

• Contributing: Roth IRA contributions must be made with money you’ve paid taxes on. The most straightforward way is to set up regular contributions. But contributions can also come from your spouse, transfers, rollover contributions from other accounts and converting funds from a traditional IRA.

• Investing: For your savings to grow beyond your contributions, you need to invest in a Roth IRA, which allows you to leverage the power of compound interest. Allowable investments include mutual funds, stocks, bonds, exchange-traded funds (ETFs) and more.

• Withdrawing: You can withdraw what you put into the Roth IRA at any time without penalty. To withdraw tax- and penalty-free earnings, you must meet IRS requirements.

Withdrawing money from a Roth IRA is known as a distribution. Qualified distributions aren’t subject to taxes or penalties. For distributions from your investment earnings to be qualified, you must meet two requirements:

1. Age: You must be 59 ½ or older.

2. The five-year rule: You must have had the account for at least five years.

As long as you meet both requirements, you can make withdrawals without owing taxes or penalties. If you make a withdrawal that doesn’t meet those requirements, not only will you owe taxes on it, but you may be subjected to an additional 10% tax penalty.

The IRS imposes income limits on who can contribute to a Roth IRA and how much they’re allowed to contribute. These limits are based on your tax-filing status and income.

Income limits can change from year to year and will be different depending on whether you file your taxes singly or jointly. However you file, the Roth IRA limit will be based on your modified adjusted gross income (MAGI). 

According to the IRS, you can generally contribute to a Roth IRA in 2026 if your MAGI is less than:

• $252,000 for married filing jointly or qualifying surviving spouse

• $168,000 for single, head of household or married filing separately who didn’t live with their spouse at any time during the year

• $10,000 for married filing separately who lived with their spouse at any time during the year

There are also limits to how much you may contribute to a Roth IRA in a given year. And the annual contribution you make to your Roth IRA must be less than the earned income you claim on your tax return for that specific tax year. But if you’re over 50, the IRS allows you to contribute more annually as part of a catch-up contribution.

Individual annual contribution limits for 2026:

• Under 50: $7,500 annual limit

• Over 50: $7,500 annual limit, plus $1,100 catch-up contribution limit, for a total of $8,600

These are the general contribution and income limits for Roth IRAs, but there are special circumstances that fall outside these guidelines. For example, single filers who earn more than $153,000 but less than $168,000 may still be able to contribute to a Roth IRA, but with a reduced contribution limit.

Roth IRAs come with both advantages and disadvantages that can affect your .

Pros:

• They provide a tax-free income stream for retirement. 

• There are no required minimum distributions.

• Contributions can be withdrawn penalty-free if you need them.

• Earnings grow tax-free.

• Roth IRAs may be passed to a beneficiary, such as your child, if you die.

Cons:

• Contribution limits are capped each year.

• There’s a 10% early withdrawal penalty on account earnings.

• There are strict income eligibility requirements.

• It’s not tax deductible.

• It may impact financial aid for your child’s college expenses because distributions are considered income.

There are many similarities between traditional IRAs and Roth IRAs, including the annual contribution limits. However, there are also some big differences between the two accounts you’ll want to be aware of.

A Roth IRA may be worth considering if you’re looking for a retirement plan with flexibility and the idea of a tax-free income stream is appealing to you. 

But Roth IRAs aren’t your only option when it comes to retirement savings. Learn more about other investment possibilities and how to start saving for retirement.