A Roth IRA is an individual retirement account funded with after-tax dollars. Qualified withdrawals in retirement are completely tax-free, including all investment gains.
How a Roth IRA Works
You contribute money you have already paid taxes on. Inside the account, your investments grow tax-free. When you withdraw in retirement (after age 59½ and the account has been open 5+ years), you owe zero taxes on the gains — no matter how much they have grown.
For 2025, the annual contribution limit is $7,000 ($8,000 if age 50+). Contributions phase out at higher incomes: $150,000-$165,000 for single filers and $236,000-$246,000 for married filing jointly.
Why Roth IRAs Matter
If you expect to be in a higher tax bracket in retirement — or if tax rates rise in the future — a Roth IRA protects your gains from taxation. Roth IRAs also have no required minimum distributions (RMDs), making them excellent wealth transfer tools.
Real-World Example
Contribute $7,000/year from age 25 to 65 (40 years) at a 7% average return. Total contributions: $280,000. Account value at 65: $1,497,446. Every dollar of that $1.2 million in gains is tax-free in retirement.
Frequently Asked Questions
What is the difference between a Roth IRA and Traditional IRA?
Traditional IRA contributions may be tax-deductible now, but withdrawals are taxed in retirement. Roth IRA contributions are not deductible, but withdrawals are tax-free. Choose Roth if you expect higher future taxes.
Can I withdraw Roth IRA contributions early?
Yes. You can withdraw your contributions (not earnings) at any time, tax-free and penalty-free. Earnings withdrawn before age 59½ may be subject to taxes and a 10% penalty.
What if my income is too high for a Roth IRA?
You can use the "backdoor Roth" strategy: contribute to a Traditional IRA (non-deductible) and then convert it to a Roth. Consult a tax advisor for the details.