What Is a Roth IRA and How Does It Work?

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If you’ve been thinking about saving for retirement, you’ve probably heard about Roth IRAs. These tax-advantaged accounts offer a powerful way to grow your money over time — and the benefits go beyond just skipping taxes in retirement.

Here’s everything you need to know about what a Roth IRA is, how it works and whether it’s the right move for your financial goals.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that lets you invest after-tax income — and then withdraw that money tax-free later in life. That’s the biggest perk: once you hit age 59½ and meet the account requirements, you can withdraw both your contributions and earnings without paying a dime in taxes.

This is different from a traditional IRA or 401(k), where you get a tax break upfront but owe taxes when you withdraw the money in retirement.

Quick Highlights:

• Contributions are made with after-tax dollars
• Qualified withdrawals are 100% tax-free
• No required minimum distributions (RMDs)
• Can be used alongside a 401(k) for more flexibility

How Does a Roth IRA Work?

With a Roth IRA, you invest money you’ve already paid taxes on. Your investments grow tax-free — and as long as you follow the rules, so do your withdrawals.

Here’s a breakdown of how it works:

• Contribute after-tax income: There’s no tax deduction when you put money in.
• Choose your investments: Your money can be invested in stocks, ETFs, mutual funds and more.
• Let it grow: Earnings grow tax-free as long as your money stays in the account.
• Withdraw funds tax-free: Once you reach 59½ and have had the account for at least five years, both contributions and earnings can be withdrawn without taxes or penalties.

Benefits of a Roth IRA

Roth IRAs offer a long list of advantages, especially if you expect to be in a higher tax bracket during retirement.

Top Benefits:

• Tax-Free Retirement Income: Withdrawals of both contributions and earnings are tax-free if you’re at least 59½ and meet the five-year rule.
• No RMDs: Unlike traditional IRAs, Roth IRAs don’t require withdrawals at a certain age.
• Penalty-Free Contribution Withdrawals: You can withdraw your contributions at any time — no taxes or penalties.
• Double Up With a 401(k): You can contribute to both a Roth IRA and a 401(k) in the same year.
• More Retirement Flexibility: Roth IRAs are great for managing your taxable income in retirement.

Who Can Contribute to a Roth IRA?

To open or contribute to a Roth IRA, you must have earned income — and your income needs to fall under certain IRS limits.

Roth IRA Income Limits for 2025

Roth IRA Contribution Limits

As of 2025, the contribution limit is:

• $7,000 if you’re under age 50
• $8,000 if you’re 50 or older (thanks to the $1,000 catch-up contribution)

You can contribute any amount up to these limits as long as you meet the income eligibility requirements.

How To Open a Roth IRA

Getting started is easier than you might think. Here’s a step-by-step guide:

1. Choose a Financial Institution

Look for providers with low fees, strong customer service, and a wide range of investment options — Fidelity, Vanguard and Charles Schwab are solid picks.

2. Confirm Eligibility

Make sure your income falls within IRS limits and that you have earned income for the year.

3. Open an Account

You can open a Roth IRA online in just a few minutes. You’ll need basic personal and financial info, including:

• Social Security number
• Employment details
• Investment goals

4. Fund Your Account

You can contribute:

• Through one-time deposits
• Automatic monthly transfers
• By rolling over funds from another retirement account (e.g., a 401(k))

5. Pick Your Investments

Once funded, choose how to invest your money. You can go DIY or use a robo-advisor. Your options include:

• Mutual funds
• Stocks
• Bonds
• Exchange-traded funds
• Money market funds
• Certificates of deposit

Roth IRA vs. Traditional IRA

Here’s how the two accounts compare side-by-side:

If you expect your income or tax rate to increase in retirement, a Roth IRA may be the better choice.

Final Thoughts to GO

A Roth IRA is one of the most flexible, tax-friendly retirement savings tools available. It gives you long-term tax-free growth and access to your contributions at any time. Whether you’re just getting started or already contributing to a 401(k), a Roth IRA can complement your retirement plan and give you more options later.

Now’s the time to start saving for your future. The earlier you begin, the more time your money has to grow — and with a Roth IRA, that growth can be completely tax-free.

Jacob Wade, Vance Cariaga, John Csiszar and Cynthia Bowman contributed to the reporting for this article.

The information is accurate as of April 8, 2025. This article has been updated with additional reporting since its original publication.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

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