What Is a Roth IRA? How It Works vs a Traditional IRA

A Roth IRA is a US individual retirement account that you fund with money you have already paid income tax on. In return, your qualified withdrawals in retirement, including all the growth, come out tax-free. A traditional IRA works the other way around: you may get a tax deduction now, but you pay tax when you take the money out.

The main question is whether you would rather pay tax today or later.

Quick answer

• A Roth IRA = after-tax contributions now, tax-free qualified withdrawals later.
• For tax year 2026, the IRS limit is $7,500, or $8,600 if you are 50 or older. That cap is shared across all your traditional and Roth IRAs.
• You need taxable compensation (such as wages or self-employment income), and your income must be under IRS limits.
• Withdrawals of earnings are tax-free when the account has been open at least five years and you are 59½ or older (or meet another IRS condition).
• Original owners never have to take required minimum distributions (RMDs) from a Roth IRA.
• A traditional IRA may give you a deduction now, but withdrawals are taxed and RMDs generally start at 73.

This is general information about US tax rules, not personal financial or tax advice. IRS limits change, so check IRS.gov or a tax professional for your situation.

How a Roth IRA works

An IRA is an account, not an investment. You open it at a bank or brokerage, add money, and choose what to hold inside it, such as funds or bonds.

With a Roth IRA:

1. You contribute after-tax money. You cannot deduct Roth contributions on your tax return.
2. Your investments grow inside the account. You don't pay yearly tax on gains while they stay in the IRA.
3. You withdraw in retirement. If the withdrawal is "qualified," you owe no federal income tax on it, including the earnings.

Because growth is never taxed on a qualified withdrawal, a Roth IRA can be especially useful when you have many years ahead for compound interest to do its work.

Who can contribute to a Roth IRA

You can put money into a Roth IRA if both of these are true:

1. You (or your spouse, if you file jointly) have taxable compensation. Wages, salary and self-employment income count. You can't contribute more than you earned for the year.
2. Your modified adjusted gross income (MAGI) is below the IRS limits. There is no age limit. You can keep contributing at any age as long as you qualify.

For tax year 2026, the amount you can contribute is reduced, then phased out completely, in these income ranges:

Below the range you can contribute the full amount; inside it, a reduced amount; above it, nothing directly. Most figures are adjusted for inflation over time.

Roth IRA vs traditional IRA

Here is how the two main types of IRA compare, based on IRS rules:

A simple way to think about it: if you expect your tax rate to be higher in retirement than it is now, paying tax today with a Roth often makes sense. If you expect a lower tax rate later, a traditional IRA's deduction may be worth more. If you're unsure, splitting savings between both spreads the risk.

Qualified withdrawals and the 5-year rule

A withdrawal of earnings from a Roth IRA is tax-free only when it is a qualified distribution. Generally, that means:

1. Your Roth IRA has been open for at least five years, and
2. One of these is true: - You are age 59½ or older. - You are disabled. - The money goes to your beneficiary after your death. - You use it for a first-time home purchase (within IRS limits).

Your original contributions are treated differently. Because you already paid tax on them, you can generally take back the amount you put in at any time without tax or penalty. Earnings are the part that must meet the qualified rules. If you take out earnings early, you may owe income tax plus an additional 10% tax unless an exception applies.

Before any early withdrawal, check IRS Publication 590-B or ask a tax professional.

How to open and fund a Roth IRA, step by step

1. Check that you qualify. Confirm you have taxable compensation and that your MAGI is below the phase-out range for your filing status.
2. Choose a provider. Compare banks and brokerages on fees, account minimums and investment choices. Make sure the firm is legitimate and registered with regulators.
3. Open the account. You will usually provide personal details and link a bank account. Name a beneficiary.
4. Add money. You can make one deposit or set up automatic monthly transfers. Keep your total across all IRAs within the yearly limit.
5. Invest the money. Choose investments that match your goals and risk tolerance; diversified, low-cost funds are a common starting point. Our guide to investing for beginners explains the basics and the risks.
6. Keep records. Save statements that show how much you contributed each year.

Before you lock money away for retirement, it helps to have a cushion for surprises. See how to build an emergency fund.

Common mistakes to avoid

• Contributing too much. The limit covers all your IRAs combined, not each one. Excess contributions can face a 6% tax unless you withdraw them in time.
• Ignoring the income limits. A raise or bonus can push you into the phase-out range.
• Leaving the money uninvested. Make sure your contributions are actually invested.
• Withdrawing earnings early. Taking out growth before the account is qualified can trigger taxes and an extra 10% tax.
• Missing the deadline. Contributions for a tax year must be made by that year's tax filing deadline, not including extensions.
• Falling for "guaranteed" returns. No legitimate IRA investment promises high, risk-free returns. That is a common scam sign.

Frequently Asked Questions

What is a Roth IRA in simple terms?

It is a retirement account where you pay tax on the money before you put it in. Your money then grows, and qualified withdrawals in retirement are tax-free.

How much can I put in a Roth IRA?

For tax year 2026, the IRS limit is $7,500, or $8,600 if you are 50 or older. The limit is shared with any traditional IRAs you have, and you can't contribute more than your taxable compensation. Higher incomes get a reduced limit or none at all.

Is a Roth IRA better than a traditional IRA?

Neither is always better. A Roth IRA tends to help most if you expect a higher tax rate in retirement, while a traditional IRA's deduction may help more if you expect a lower one. Many people use both to keep options open.

Can I take money out of a Roth IRA before 59½?

You can generally withdraw your original contributions at any time without tax or penalty. Earnings are different: taking them out before you meet the qualified rules can mean income tax plus an additional 10% tax, unless an exception applies.

Do Roth IRAs have required minimum distributions?

No, not for the original owner. You can leave the money in your Roth IRA for as long as you live. Beneficiaries who inherit a Roth IRA may have to take distributions, and traditional IRA owners generally must start RMDs at age 73.

Can I have both a Roth IRA and a traditional IRA?

Yes. You can own both, but your total contributions to all your IRAs in a year can't exceed the single annual limit. A budget can help you decide how much to set aside for each.

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Sources

• IRS – 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500
• IRS – Retirement topics: IRA contribution limits
• IRS – Traditional and Roth IRAs
• IRS – Retirement plan and IRA required minimum distributions FAQs