What Is a Roth IRA and How Does It Work?

A Roth IRA is an individual retirement account that lets you save and invest for retirement with after-tax dollars. Unlike a traditional IRA, a Roth IRA does not provide an upfront tax deduction. Instead, the potential tax benefit comes later: qualified withdrawals are tax-free in retirement.

A Roth IRA is an account, not an investment itself. You can open a Roth IRA through a brokerage firm, bank, or other financial institution. Once you contribute money, you can typically invest it in a range of investment options, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and certificates of deposit (CDs), depending on where you open the account. IRAs can hold many types of investments, but IRS rules restrict certain assets, including life insurance contracts and collectibles.

The contribution limits for both Roth and traditional IRAs are the same. For 2026, each taxpayer is limited to a maximum contribution of $7,500 if you're under age 50, with a catch-up contribution of $1,100 available to those age 50 and older. To count toward a specific tax year, Roth IRA contributions generally must be made by that year's tax-filing deadline.

Note: The contribution limit is a combined total, which means if you want to contribute to both a Roth and a traditional IRA, your total contributions can't exceed the annual per-person limit. For example, if you're under 50 and contribute $4,000 to a traditional IRA in 2026, you could contribute up to $3,500 to a Roth IRA for that same tax year, assuming you're eligible.

To contribute to a Roth IRA, you generally need earned income, such as wages, salary, tips, commissions, or self-employment income. Your annual contribution also can't exceed your earned income for the year. 

Roth IRA contributions are also subject to income limits based on your modified adjusted gross income (MAGI) and tax filing status. If your income exceeds certain IRS limits, the amount you can contribute may be reduced or eliminated.

Your modified adjusted gross income (MAGI) and tax filing status determine whether you can make a full contribution, a reduced contribution, or no direct Roth IRA contribution for the year. The table below shows the 2026 income thresholds for each category. These limits can change annually and are based on your MAGI and tax filing status.

Roth IRA withdrawal rules depend on whether you're withdrawing contributions or investment earnings:

• Roth IRA contributions: You can generally withdraw your Roth IRA contributions at any time tax- and penalty-free, because you've already paid taxes on that money.
• Roth IRA earnings: Withdrawals of investment earnings are treated differently. To withdraw earnings tax- and penalty-free, the distribution must be qualified. That means you must have held assets in your Roth IRA for at least five tax years and be age 59½ or older.

If you withdraw earnings before meeting those requirements, your earnings may be subject to income taxes and a 10% federal tax penalty unless an IRS-approved exception applies. 

Penalty exceptions may include withdrawals used for:

• A qualified first-time home purchase, up to a $10,000 lifetime limit
• Qualified birth or adoption expenses
• Certain unreimbursed medical expenses
• Health insurance premiums while unemployed
• Qualified education expenses
• Disability
• Distributions made to your beneficiary after your death

Roth IRA withdrawal rules can be complex. Consider speaking with a tax advisor before withdrawing earnings early.

Roth IRAs and traditional IRAs both offer tax advantages, but the timing of the tax benefit is different. With a traditional IRA, you can contribute pre-tax dollars and your contributions may be tax-deductible, depending on your income and whether you're covered by a workplace retirement plan. Investments in a traditional IRA can grow tax-deferred, but withdrawals are generally subject to ordinary income tax later.

With a Roth IRA, contributions are made with after-tax dollars and are not tax deductible. The potential benefits of a Roth IRA come later: Your investments can grow tax-free, and qualified withdrawals are generally tax-free in retirement.

A Roth IRA may be worth considering if you think your tax bracket could be higher in retirement than it is today. In that case, paying taxes now may be more appealing than paying later at a higher tax rate. On the other hand, if you expect your tax bracket to be lower in retirement, a traditional IRA may be more appealing because it may provide a tax deduction now.

A Roth IRA may offer several potential benefits:

• Tax-free qualified withdrawals: Roth IRA contributions are made with after-tax dollars, and qualified withdrawals of investment earnings are generally tax-free. 
• Flexible access to contributions: Roth IRA contributions can generally be withdrawn at any time tax- and penalty-free.
• No required minimum distributions (RMDs): Unlike most retirement savings accounts, Roth IRAs are not subject to RMDs. That means you can leave the money in the account for as long as you live, if you choose.
• Potential tax-free withdrawals for heirs: If you pass your Roth IRA on to your heirs, they can generally withdraw the money tax-free, as long as they follow IRS distribution rules.
• Tax diversification: A Roth IRA can help diversify the tax treatment of your retirement savings. Having both taxable and tax-free sources of retirement income may give you more flexibility when managing taxable income in retirement.

Roth IRAs can offer valuable tax benefits, but they also come with rules and limitations.

• No upfront tax deduction: Roth IRA contributions are made with after-tax dollars, so they are nondeductible.
• Income limits apply: Your ability to contribute may be reduced or eliminated if your income exceeds IRS limits.
• Annual contribution limits apply: Roth IRA contributions count toward your combined traditional and Roth IRA contribution limit.
• Early earnings withdrawals may trigger taxes and penalties: Contribution withdrawals are generally more flexible than investment earning withdrawals.
• Backdoor Roth IRA strategies may have tax consequences: If you convert pre-tax traditional IRA assets to a Roth IRA, the converted amount is generally taxable in the year of the Roth IRA conversion.

Roth IRAs can be a useful retirement savings tool, if you're eligible and want the potential for tax-free growth and tax-free qualified withdrawals later. The trade-off is that contributions are made with after-tax dollars, so you won't receive an upfront tax deduction. Whether a Roth IRA makes sense for you may depend on your income, tax situation, retirement timeline, and how you want to manage taxes in retirement.