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Roth IRA: What it is & how it works
A Roth IRA is an individual retirement account that you fund with after-tax dollars. While you don't get a tax break now, your contributions and investment earnings grow tax-free.
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What is a Roth IRA?
A Roth IRA is a type of individual retirement account. The main appeal of a Roth IRA is that you contribute after-tax money, which then grows and can be withdrawn in retirement tax-free.
That tax treatment is one way Roth IRAs differ from traditional IRAs. In traditional IRAs, contributions are tax-deductible in the year they're made. Then, in retirement, withdrawals are taxed as ordinary income.
How does a Roth IRA work?
You contribute to a Roth IRA using money that has already been taxed. Those contributions can then be invested in stocks, ETFs, bonds or more. Over time, the investments in your Roth IRA could earn a return, growing tax-free. At age 59 ½ (and as long as the account is at least five years old), you can withdraw your contributions and earnings tax-free.
How do I contribute?
You can contribute to a Roth IRA through earned income, such as money earned through a job or a spousal contribution. These are also called direct contributions, and there are limits to how much you can add every year. The contribution limit is $7,000 in 2025 ($8,000 if aged 50 and older). For 2026, the limit is $7,500 ($8,600 if aged 50 and older).
Other ways to add money to your Roth IRA include a 401(k) plan rollover, or a conversion from an existing IRA or other type of retirement plan. There is no cap on rollovers or conversions. They also don’t count towards your annual contribution limit.
Can you invest in cryptocurrency through a Roth IRA?
"There are a few niche Roth IRA providers that allow people to invest directly in cryptocurrency, but most Roth IRAs disallow crypto trading for regulatory reasons. However, investors with typical Roth IRAs can still get crypto exposure through a spot Bitcoin ETF, a spot Ethereum ETF or crypto strategy ETFs."
Sam Taube
Setting up a Roth IRA
A Roth IRA can be opened through any financial institution, such as a bank, brokerage or robo-advisor, that has been approved by the IRS to offer IRAs. Part of the account setup process includes providing a few pieces of information. This could include your ID, such as a passport or driver’s license, bank account information and proof of employment.
Choosing where to open your Roth IRA depends on your preferences. Consider whether you want to manage the account yourself or be hands-off, and what types of investments you want access to. If you’d like to manage your own Roth IRA, you can consider opening one at a brokerage. Otherwise, a robo-advisor could be a good choice for passive management.
*Self-directed investing typically has lower costs because investors manage their own portfolios, while robo-advisors are automated investing services that use data and algorithms to build and manage investment portfolios.
When it comes to Roth IRAs, the maximum contribution amount for 2025 is $7,000 for those under 50 and $8,000 for those 50 and older. In 2026, the limit is $7,500 and $8,600 for those 50 and older.
Whether you can contribute directly — and how much you can contribute — depends on your tax filing status and annual income. You can contribute to your Roth IRA up until the Tax Day deadline.
2025 Roth IRA eligibility rules
For 2025, if your modified adjusted gross income (MAGI) is below $150,000 (single filers) or below $236,000 (married filing jointly), you can contribute the full amount the IRS allows to a Roth IRA. At higher incomes, the amount you can contribute becomes smaller until you are no longer eligible.
2025 filing status
Annual Roth IRA income thresholds and phaseouts
Single, head of household or married filing separately (if you didn't live with spouse during the year)
Full contribution: Less than $150,000.
Partial contribution: Between $150,000 and $165,000.
No Contribution: $165,000 or more.
Married filing jointly or surviving spouse
Full contribution: Less than $236,000.
Partial contribution: Between $236,000 and $246,000.
No Contribution: $246,000 or more.
Married filing separately (if you lived with spouse at any time during the year)
Partial contribution: Less than $10,000.
No contribution: $10,000 or more.
2026 Roth IRA eligibility rules
The IRS released new income eligibility rules for Roth IRA contributions for 2026. If your MAGI is less than $153,000 as a single filer or $242,000 as married filing jointly, you can make the full Roth IRA contribution.
2026 filing status
Annual Roth IRA income thresholds and phaseouts
Single, head of household or married filing separately (if you didn't live with spouse during the year)
Full contribution: Less than $153,000.
Partial contribution: Between $153,000 and $168,000.
No Contribution: $168,000 or more.
Married filing jointly or surviving spouse
Full contribution: Less than $242,000.
Partial contribution: Between $242,000 and $252,000.
No Contribution: $252,000 or more.
Married filing separately (if you lived with spouse at any time during the year)
High earners could explore a backdoor Roth IRA to convert funds from a traditional IRA to a Roth, or a mega backdoor Roth to convert from a 401(k) plan to a Roth IRA (if your plan allows).
What types of Roth IRAs can you have?
Spousal Roth IRAs. A spousal Roth IRA is a Roth IRA held in the name of a married individual with little to no earned income. Contributions come from the working spouse’s income. This account follows the same tax treatment and eligibility requirements as a normal Roth IRA.
Inherited Roth IRAs. An inherited Roth IRA is a Roth IRA that’s been inherited by the beneficiary after the original account owner dies. Beneficiaries of a Roth IRA are subject to unique rules compared with account holders, such as being subject to required minimum distributions (RMDs).
Rollover Roth IRAs. A rollover Roth IRA refers to a transfer of funds from an employer-sponsored account, such as a 401(k) plan, to a Roth IRA. This is often an option for people who leave their jobs and want to move the funds out of their employer-sponsored plan. It also can be done by high earners who aren’t able to contribute directly to their Roth IRA (a strategy also known as a mega backdoor Roth).
Custodial Roth IRAs. A custodial Roth IRA is a retirement account owned by a minor but managed by an adult custodian until the minor reaches adulthood. There is no age limit for a custodial Roth IRA, but the minor must have a form of earned income.
Withdrawal rules
Setting aside money in a retirement account — and not being able to access it for years — can feel intimidating.
With a Roth IRA, you can withdraw your original contributions whenever you want. You won't owe any penalties or taxes, no matter how long your account has been open. That's because the money you put in is money you've already paid income tax on. When you withdraw money from a Roth IRA, the IRS always assumes your original contributions come out first.
If you’re withdrawing investment earnings, on the other hand, those withdrawals can fall under one of two categories:
Qualified distributions. A qualified distribution from a Roth IRA is any withdrawal made without taxes or penalties.
Nonqualified distributions: A nonqualified distribution from a Roth IRA is a withdrawal of investment earnings that incurs taxes, penalties or both.
In contrast to the traditional IRA, Roth IRAs do not have RMDs, in which account holders are required to withdraw a certain amount every year in retirement.
The five-year rule is a guideline that determines when account holders can withdraw earnings from their Roth IRA accounts without incurring taxes or penalties. Typically, the account needs to be open for five years — and the account holder must reach age 59 ½ — before earnings can be withdrawn without taxes and penalties. However, there are also specific five-year rules for Roth IRA conversions, inherited Roth IRAs and more.
Roth vs. traditional IRAs
The biggest difference between a Roth IRA and a traditional IRA is their tax treatment. Many people have both types of IRAs as part of their retirement planning. You can also contribute to both in the same year as long as you qualify and don’t exceed the annual contribution limit. (See the full comparison of Roth vs. traditional IRAs).
Roth IRA
Traditional IRA
Tax treatment
Contributions are made with after-tax dollars; qualified withdrawals in retirement are tax-free.
Contributions may be tax-deductible; withdrawals in retirement are taxed as ordinary income.
Income limits
Eligibility to contribute phases out at higher income levels.
No income limit to contribute, but tax deductibility depends on annual income and participation in an employer-sponsored retirement plan.
Required minimum distributions
No RMDs during the account holder’s lifetime.
RMDs are required starting at age 73. In 2033, the age increases to 75.
Benefits and drawbacks
Benefits of a Roth IRA
What makes a Roth IRA so attractive to investors is the potential tax savings:
Long-term financial planning. If you think you'll be in a higher tax bracket when you retire than you are now, a Roth IRA may be more beneficial than a traditional IRA for long-term financial planning. The reason: You've already paid taxes on your contributions, so your withdrawals won’t result in extra taxes when it's time to enjoy your hard-earned money.
Rising inflation. Inflation erodes the value of money over time. Giving your money an opportunity to grow tax-free can be extra lucrative when inflation is high.
Drawbacks of a Roth IRA
There are a few drawbacks to a Roth IRA:
Five-year wait to withdraw earnings. If you are close to retirement, waiting five years to withdraw the earnings from your first Roth IRA contribution could be a drawback. Ignoring this rule could result in paying income taxes and a 10% penalty.
No tax deductions. You also aren’t eligible for any tax deductions during the year you contribute, unlike with a traditional IRA. Tax deductions are helpful, as they can reduce your adjusted gross income and your overall tax bill for the year you contribute. You may qualify to claim the saver’s credit, which is a tax credit you get for making eligible contributions to an IRA. Keep in mind that the credit has income restrictions.
Income limits. Roth IRAs have income limits, unlike traditional IRAs. If you make more than the allowed amount, you may not qualify for a Roth IRA.
NWWP is an SEC-registered investment adviser. Registration does not imply skill or training. Calculator by NerdWallet, Inc., an affiliate, for informational purposes only.
Frequently asked questions
Should you contribute to a 401(k) or a Roth IRA?
You don't have to choose. As long as you're eligible for a Roth IRA, you can contribute to that alongside an employer-sponsored retirement plan like a 401(k). This route does require having enough money to contribute to both, which isn't always possible. If you need to choose one place to direct your dollars, read our comparison of 401(k)s vs. IRAs.
Can you lose money in a Roth IRA?
Yes. You can put your Roth IRA money in a variety of investments. Some of those investments may lose value, especially in the short term. It's important to understand your risk tolerance when choosing investments.
When should I contribute to my Roth IRA?
Your eligibility and contribution amount to a Roth IRA depends on your income amount. Occasionally, receiving a salary increase or bonus might push you into a higher income bracket. This could affect how much you can contribute to your Roth IRA or if you can contribute at all. Depending on your circumstances, you can make contributions to your Roth IRA in incremental payments or pay a lump sum closer to the tax deadline.
If you accidentally overcontributed to a Roth IRA, you can withdraw the money to potentially avoid penalties and taxes.
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