What Is a Roth IRA? Rules and How to Open One

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A Roth IRA is an individual retirement account that you fund with money you have already paid income tax on. In exchange for giving up a tax deduction today, your investments grow without annual tax. Withdrawals of earnings are also tax-free once you are at least 59½ and your first Roth IRA has been open for at least five years. You can take back the money you contributed at any time, for any reason, without tax or penalty. The account has no required withdrawals during your lifetime.

What Is a Roth IRA?

The IRS calls it an individual retirement arrangement. In everyday finance, IRA stands for individual retirement account. “Roth” comes from Senator William Roth of Delaware, who sponsored the provision in the Taxpayer Relief Act of 1997. The account became available in 1998. Before then, the traditional IRA was the main individual retirement account, and its tax benefit worked the opposite way.

Both account types shelter investment growth from annual taxation. The difference is when the tax is paid:

• Traditional IRA: contributions are often tax-deductible, so you invest pre-tax money. You pay ordinary income tax on withdrawals in retirement.
• Roth IRA: contributions are never deductible, so you invest money that has already been taxed. Qualified withdrawals, including all the growth, are tax-free.

A Roth IRA is a tax wrapper, not an investment. It holds whatever you choose to buy inside it: funds, stocks, bonds, CDs or cash. Money left uninvested in cash barely grows.

How a Roth IRA Works

Ways money gets into a Roth IRA

A Roth IRA can be funded from several sources:

• Regular contributions from your own earned income.
• Spousal contributions, made on behalf of a spouse with little or no income.
• Transfers from another Roth IRA, moved directly between custodians.
• Rollovers, such as moving a Roth 401(k) balance into a Roth IRA.
• Conversions, where pre-tax money from a traditional IRA or similar account is moved into a Roth IRA and taxed in the year of conversion.

Regular contributions must be made in cash, which includes checks, money orders and electronic transfers. You cannot contribute shares, crypto or property directly. Only rollover contributions can arrive as existing assets. To own a stock inside the account, you deposit cash and then buy the stock within the IRA.

The annual contribution limit applies only to regular and spousal contributions. Transfers, rollovers and conversions do not count against it.

Contribution limits for 2026

The IRS sets the maximum and adjusts it periodically for inflation. For 2026:

• Under age 50: $7,500 per year, which works out to $625 per month.
• Age 50 or older: $8,600 per year, which includes a catch-up amount and works out to roughly $716.67 per month.

Three details change how much you can actually deposit:

1. The limit is shared across all your IRAs. Traditional and Roth IRAs have the same cap, and it covers your IRAs combined. If you put $3,000 into a traditional IRA, you can put at most $4,500 (under 50) into Roth IRAs for the same year. Opening several Roth IRAs does not multiply the limit.
2. You cannot contribute more than your taxable compensation. Someone who earned $4,000 from a summer job can contribute at most $4,000, even though the general limit is higher.
3. The deadline is the tax-filing deadline, not December 31. Contributions for a tax year can be made until your filing deadline the following year, normally April 15. When you deposit between January 1 and the deadline, tell the custodian which year the contribution is for.

You can open the account at any time, and a single deposit, irregular amounts or automatic monthly transfers all count the same toward the annual limit.

What counts as eligible income

A Roth IRA can only be funded from earned income, which the IRS calls compensation.

For employees, compensation includes wages, salaries, commissions, bonuses and other pay for services performed. It is generally the amount in Box 1 of Form W-2.

For self-employed people, partners and members of pass-through businesses, compensation is net earnings from the business. It is reduced by any deduction for retirement plan contributions made on your behalf and by the deduction for half of your self-employment tax.

Taxable alimony also counts, but only under a divorce or separation agreement executed before December 31, 2018. Child support does not count.

Money that does not qualify as compensation includes:

• Rental income and other profits from property
• Interest income
• Pension or annuity income
• Dividends and capital gains
• Passive income from a partnership in which you do not provide substantial services

A retiree living entirely on Social Security, a pension and portfolio income cannot make regular Roth IRA contributions, however large their savings. A spousal contribution or a conversion are the other ways into the account.

Because contributions are not deductible, they do not lower your tax bill directly. Lower- and moderate-income savers may still qualify for the Saver’s Credit, which equals 10%, 20% or 50% of eligible retirement contributions depending on income and filing status.

Income limits and the phaseout

Too much income blocks direct contributions. Eligibility depends on filing status and modified adjusted gross income (MAGI). Below the phaseout range you can contribute the full limit (or your compensation, if lower). Inside the range your limit shrinks. At or above the top you cannot contribute directly.

Inside the phaseout range, the reduced limit is:

Reduced limit = Annual limit × (Top of range − Your MAGI) ÷ Width of range

Hypothetical example: A single filer under 50 has a 2026 MAGI of $160,000. The range runs from $153,000 to $168,000, so it is $15,000 wide.

• Top of range minus MAGI: $168,000 − $160,000 = $8,000
• Fraction allowed: $8,000 ÷ $15,000 = 0.5333
• Reduced limit: $7,500 × 0.5333 = $4,000

Under the IRS worksheet in Publication 590-A, the result is rounded up to the next multiple of $10. If it falls below $200 but above zero, you can still contribute $200. This filer could put $4,000 into a Roth IRA for 2026 and could put the remaining $3,500 of the shared IRA limit into a traditional IRA, whether deductible or not.

The spousal Roth IRA

There is no such thing as a joint IRA. Each Roth IRA belongs to one person. When only one spouse works, the working spouse can contribute to a spousal Roth IRA owned by the non-working or low-earning spouse. It follows the same income limits, investment rules and withdrawal rules as any other Roth IRA.

To qualify:

• The couple must be married and file a joint tax return.
• The contributing spouse must have eligible compensation.
• Combined contributions to both spouses’ IRAs cannot exceed the taxable compensation reported on the joint return.
• Each account is still capped at the individual limit, so the couple can shelter up to two full limits in a year.

How a Roth IRA Makes Money

A Roth IRA does not pay a fixed interest rate of its own. Returns come from what you hold inside it: a cash sweep earns what the sweep pays, a CD earns the CD rate, and a stock index fund rises and falls with the market. Over long periods the main driver of growth is compound interest, and the Roth wrapper means no tax is taken out along the way.

Allowed investments

A standard Roth IRA at a bank or brokerage can typically hold:

• Mutual funds and exchange-traded funds (ETFs)
• Individual stocks
• Bonds and Treasury securities
• Certificates of deposit (CDs)
• Money market funds

What is actually available depends on the custodian. A bank Roth IRA may offer only CDs and savings products. A brokerage Roth IRA usually offers a wide range of funds and securities.

Prohibited investments

The tax code bars certain assets from IRAs entirely:

• Life insurance contracts
• Collectibles, such as artwork, antiques, gems, stamps, most coins and alcoholic beverages (certain coins minted by the U.S. Treasury and certain bullion meeting purity standards are exceptions)
• S corporation stock (an IRA is not an eligible S corp shareholder)

Using IRA money to buy a collectible is generally treated as a distribution of that amount.

Self-directed Roth IRAs and alternative assets

A self-directed IRA (SDIRA) is held with a specialized custodian that allows assets most brokerages do not offer: investment real estate, private partnerships, tax liens, precious metals, private businesses and digital assets. The investor chooses and manages the holdings, and the custodian handles title and recordkeeping.

The wider menu comes with stricter obligations. Prohibited transaction rules forbid using the IRA to benefit yourself or close family directly, for example by living in a property your IRA owns or lending IRA money to yourself. Breaking these rules can disqualify the account. The SEC has also issued investor alerts about fraud schemes that target self-directed IRA owners. Alternative assets can also be hard to value and hard to sell quickly.

Crypto in a Roth IRA

No rule prohibits holding cryptocurrency in an IRA. You cannot contribute coins directly, though. You contribute cash and buy the crypto inside the account. Most mainstream IRA custodians limit holdings to their approved list of securities, so direct crypto exposure usually requires a self-directed custodian, or a crypto-linked fund if your custodian offers one.

The Roth structure matters for volatile assets. A large gain withdrawn from a traditional IRA is taxed as ordinary income, while in a Roth IRA it can come out tax-free if the distribution is qualified. On the way down, losses inside the account cannot be deducted, and the contribution room used to buy the asset does not come back.

Roth IRA Withdrawal Rules

Contributions come out first

Roth IRA distributions follow a fixed ordering rule, regardless of what you sell or which account you draw from:

1. Regular contributions
2. Conversion and rollover amounts, oldest first (the taxable part of each conversion before any nontaxable part)
3. Earnings

All your Roth IRAs are treated as one account for this purpose. Because contributions come out first and you already paid tax on them, you can withdraw up to your total contributions at any time, at any age, with no tax and no 10% penalty. Earnings are reached only after every contributed dollar, and then every converted dollar, has been withdrawn. Money you withdraw cannot be put back later except through the narrow 60-day rollover rules.

Qualified distributions

A qualified distribution is entirely tax-free and penalty-free, earnings included. It requires both of the following:

1. At least five years have passed since the start of the tax year for which you first contributed to any Roth IRA.
2. At least one of these events applies:
   • You are age 59½ or older.
   • You are disabled.
   • The distribution goes to your beneficiary or estate after your death.
   • The money is used for a first-time home purchase (buying, building or rebuilding) for you or a qualifying relative: your spouse, your or your spouse’s child or grandchild, or your or your spouse’s parent or other ancestor. This is capped at $10,000 over your lifetime.

Meeting only one requirement is not enough. A 62-year-old who opened a first Roth IRA three years ago does not yet have qualified distributions of earnings. Neither does a 40-year-old whose account is fifteen years old, unless one of the other qualifying events applies.

The five-year rules

Two separate five-year clocks apply, and they are often confused.

The five-year rule for qualified distributions. This clock starts on January 1 of the tax year of your first Roth IRA contribution, and it runs only once in your life. A contribution made in April 2027 for tax year 2026 starts the clock on January 1, 2026, so the five years are complete on January 1, 2031. Opening new Roth IRAs later does not restart it.

The five-year rule for conversions. Each conversion has its own five-year clock for the 10% penalty. If you are under 59½ and withdraw converted money within five years of that conversion, the taxable portion that was converted can be hit with the 10% penalty, even though you already paid income tax on it. After 59½, this penalty no longer applies.

Here is how earnings withdrawals are treated:

In every row, your original contributions still come out tax-free and penalty-free.

Non-qualified distributions and penalty exceptions

A withdrawal of earnings that is not qualified is a non-qualified distribution. The earnings portion is included in taxable income and, if you are under 59½, generally carries a 10% additional tax. Several exceptions remove the penalty, though not the income tax:

• Unreimbursed medical expenses above 7.5% of your adjusted gross income (AGI).
• Health insurance premiums paid while you are unemployed and meet the unemployment requirements.
• Qualified higher education expenses for you, your spouse, or your or your spouse’s children or grandchildren: tuition, fees, books, supplies and required equipment at an eligible institution.
• Birth or adoption expenses, up to $5,000 per child, taken within one year of the birth or finalized adoption.
• First-time home purchase, up to the $10,000 lifetime limit, when the five-year rule has not been met.
• Disability, and distributions to a beneficiary after the owner’s death.

Because of the ordering rule, these exceptions matter only once a withdrawal reaches the earnings layer. Someone who has contributed $40,000 and needs $15,000 for a medical bill takes contributions only, with no tax and no penalty, and no exception is needed.

Taking back a current-year contribution

A contribution can be withdrawn before your tax-filing deadline (including extensions) for that year. If you do, it is treated as if it had never been made. You must also withdraw the earnings attributable to it, and those earnings are taxable income for the year of the contribution. They may also face the 10% penalty if you are under 59½.

Hypothetical example: You contribute $5,000 and it earns $500 before you realize your income will exceed the limit. You withdraw $5,500 before the deadline. The $5,000 comes back tax-free, and the $500 is reported as income. This is also how you fix an over-contribution before it triggers the 6% excise tax described below.

Example of a Roth IRA

The following hypothetical shows how the rules combine. The return figures are illustrations, not a forecast.

Maria opens her first Roth IRA at 30 and contributes for tax year 2026. Her five-year clock therefore starts on January 1, 2026. She contributes $5,000 a year for 10 years, a total of $50,000 in contributions, and invests in a diversified fund. At 40, her account is worth $72,000: $50,000 of contributions and $22,000 of earnings.

Scenario 1: Emergency at 40. Maria needs $20,000. Under the ordering rule, the withdrawal comes entirely from contributions. She owes no tax and no penalty, and she does not report it as income (it is reported on Form 8606). Her remaining contribution basis is $30,000.

Scenario 2: Larger withdrawal at 40. She instead withdraws $60,000. The first $50,000 is contributions and comes out tax-free. The remaining $10,000 is earnings. If she spends it on ordinary expenses, the distribution is not qualified: the $10,000 is taxable income, plus a $1,000 (10%) penalty unless an exception applies. If the $10,000 pays for a first home, it is a fully qualified distribution, because her account has passed five years and a first-time home purchase within the $10,000 lifetime cap is a qualifying event.

Scenario 3: Leaving it alone. Maria stops contributing and lets the $72,000 compound. At a hypothetical 6% a year it would roughly double about every 12 years, reaching about $290,000 by age 64: $50,000 of contributions and about $240,000 of earnings. Because she is over 59½ and the account is well past five years old, every dollar she withdraws is tax-free, and unlike with a traditional IRA she does not have to withdraw anything at 73.

Roth IRA vs. Traditional IRA

Both accounts share the same contribution limit, deadline and investment choices. The differences are in taxes, eligibility and flexibility.

Which one comes out ahead

When the tax rate is the same today and in retirement, the two accounts produce the same after-tax result. Hypothetical example, assuming a 22% tax rate both now and later and investments that double:

• Traditional: $7,500 of pre-tax income goes in and grows to $15,000. Tax of 22% on withdrawal leaves $11,700.
• Roth: $7,500 of pre-tax income is taxed first, leaving $5,850 to invest. It grows to $11,700 and comes out tax-free: $11,700.

The outcome changes only when the rates differ:

• If your rate is higher in retirement, the Roth wins, because you paid tax at the lower rate.
• If your rate is lower in retirement, the traditional IRA wins, because the deduction saved tax at the higher rate.

This is why a Roth IRA often suits younger and lower-income workers, whose current bracket is likely lower than in later peak-earning years and who have decades for growth to compound tax-free. It also suits people who expect tax rates to rise or who want tax-free income to mix with taxable pension and traditional account withdrawals in retirement.

One effect is easy to miss: the contribution limit is the same nominal amount for both accounts, but $7,500 of after-tax Roth money is the equivalent of more than $7,500 of pre-tax savings. For someone who can afford to max out either account, the Roth shelters more money in effect.

Roth IRA vs. 401(k) and Roth 401(k)

A 401(k) is an employer-sponsored plan, while a Roth IRA is an account you open yourself. Many people use both. The limits are separate, so contributing to a 401(k) does not reduce what you can put into a Roth IRA.

Key differences:

• Contribution limits: For 2026, employees can defer up to $24,500 into a 401(k), plus an $8,000 catch-up at 50 or older, far more than the $7,500 IRA limit.
• Employer match: 401(k) plans can include employer matching contributions. IRAs have no match.
• Investment choice and fees: A 401(k) offers only the plan’s menu and can carry administrative and fund fees you cannot avoid. In an IRA, you pick the provider and the funds.
• Income limits: A Roth 401(k) has no income limit, so high earners locked out of a Roth IRA can still make Roth contributions at work if the plan offers them.
• Tax treatment: A traditional 401(k) works like a traditional IRA (pre-tax in, taxed out). A Roth 401(k) works like a Roth IRA (after-tax in, qualified withdrawals tax-free).

Starting in 2024 under the SECURE 2.0 Act, Roth 401(k) accounts no longer have required minimum distributions for the original owner, but they have their own five-year and distribution rules. Rolling a Roth 401(k) into a Roth IRA after leaving a job moves the money into the IRA’s more flexible withdrawal rules and its wider investment menu.

A common ordering for savers with access to both: contribute enough to the 401(k) to capture any full employer match, then fund a Roth IRA, then return to the 401(k) for additional savings. The right order still depends on plan fees, the match formula and your tax situation.

Roth Conversions and the Backdoor Roth

A Roth conversion moves money from a traditional IRA or another pre-tax account into a Roth IRA. The converted pre-tax amount is added to your taxable income for that year, and the converted money and its future growth can later come out tax-free. Conversions have no income limit and no annual cap, and they do not count against the contribution limit. Some people convert to lock in today’s tax rates if they expect higher rates later. Others convert in years of unusually low income.

That lack of an income limit created the backdoor Roth IRA. Someone whose MAGI is too high for a direct contribution makes a nondeductible contribution to a traditional IRA and then converts it to a Roth. If the person has no other pre-tax IRA money, the conversion is mostly untaxed, because the contribution was already after-tax.

If they do have other pre-tax IRA balances, the pro-rata rule applies. The IRS treats all traditional, SEP and SIMPLE IRAs as one pool when determining what share of the conversion is taxable. With $93,000 of pre-tax IRA money and a $7,000 nondeductible contribution, about 93% of any conversion would be taxable. Conversions are reported on Form 8606.

How to Open a Roth IRA

Anyone with earned income who is under the income limits can open a Roth IRA. There is no minimum or maximum age. A child with earned income, for example from a job or legitimate self-employment such as babysitting or lawn care, can contribute up to their earnings for the year, usually through a custodial Roth IRA that an adult manages until the child reaches the age of majority in their state. Parents or others can supply the cash, as long as it does not exceed the child’s compensation.

Steps

1. Confirm eligibility. Compare your expected earned income and MAGI with the phaseout table above.
2. Choose a custodian. Banks, brokerage firms, federally insured credit unions and savings and loan associations can be approved to hold IRAs. Most people choose brokerages for the wider investment choice.
3. Gather information: your Social Security number, a government ID, employment details, a bank account for funding and beneficiary names.
4. Complete the account documents. The custodian must give you an IRA disclosure statement and the adoption agreement or plan document, which form your agreement with the custodian or trustee.
5. Fund the account by transfer, check or rollover, and specify the tax year for contributions made between January 1 and the filing deadline.
6. Invest the money. Some providers invest automatically through a target-date fund or managed portfolio. Others leave the cash idle until you place a trade.
7. Name beneficiaries. The designation generally controls who inherits the account and affects how quickly the money must be withdrawn later.

Choosing where to open one

There is no single best place to open a Roth IRA. It depends on how you plan to invest. Compare providers on:

• Account minimums: some providers have none, while some managed or robo-advisor accounts require a starting balance.
• Costs: trading commissions, fund expense ratios, advisory fees on managed accounts, and any annual, inactivity, transfer-out or closing fees.
• Investment menu: a bank Roth IRA limited to CDs suits a different saver than a full brokerage account with ETFs, index funds, individual stocks and bonds.
• Management style: do-it-yourself trading or automated portfolios for a hands-off approach.
• Relationship benefits: existing customers sometimes qualify for fee discounts or linked banking features.

For assets such as real estate or private investments, a standard provider will not work. You need a custodian that specializes in self-directed IRAs.

Legally, you can start with any amount up to your limit. In practice, you need the provider’s minimum, plus enough to buy at least one fund share, or a fractional share if the provider offers fractional investing.

Are Roth IRAs Insured?

Insurance depends on what the account holds and where it is held.

At an FDIC-insured bank, deposits held in IRAs (savings accounts, money market deposit accounts and CDs) fall into a separate ownership category called certain retirement accounts. Coverage is $250,000 per depositor per bank, and all of your traditional and Roth IRA deposits at that bank are added together under that one limit rather than insured separately.

Example: If you hold a $200,000 CD in a traditional IRA and $100,000 in a Roth IRA savings account at the same bank, your IRA deposits total $300,000. Only $250,000 is covered, leaving $50,000 uninsured.

FDIC insurance does not cover stocks, bonds, mutual funds or ETFs, even when they are bought through a bank. At a brokerage, SIPC protection covers customers if the brokerage firm itself fails and securities are missing, up to $500,000 per customer including $250,000 for cash. Neither FDIC nor SIPC protects against investment losses from market declines.

Inherited Roth IRAs and Estate Planning

What happens to an inherited Roth IRA depends on who inherits.

• Spouse: A surviving spouse can treat the inherited Roth IRA as their own, or roll it into their own Roth IRA, which keeps the no-RMD treatment during their lifetime.
• Most other beneficiaries: For owners who died in 2020 or later, the SECURE Act generally requires the account to be emptied by the end of the tenth year after death. Certain eligible designated beneficiaries, such as minor children of the owner, disabled or chronically ill individuals, and people not more than 10 years younger than the owner, can still stretch withdrawals over their life expectancy.
• Accounts inherited before 2020 can generally continue the older stretch approach over the beneficiary’s lifetime.

Distributions to a beneficiary are generally tax-free, provided the original owner’s five-year holding period is met. A traditional IRA beneficiary, by contrast, owes ordinary income tax on every withdrawal. For families that use trust funds or detailed estate plans, a Roth IRA can pass a larger after-tax amount than an equal-sized traditional IRA.

Limitations of a Roth IRA

The tax benefits come with real constraints.

• No upfront deduction. If your tax rate in retirement turns out lower, a traditional account would have been better.
• Low contribution limits. At $7,500 for 2026, the IRA limit is less than a third of the 401(k) deferral limit, so a Roth IRA alone rarely funds a full retirement.
• Income and earned-income rules. High earners must use the backdoor route, with its pro-rata complications, and investment, pension and rental income do not qualify.
• No employer match.
• Lost room is gone. Unused contribution room does not carry forward, and withdrawn contributions cannot be redeposited later beyond limited rollover rules.
• Tax-law risk. Roth benefits rest on current law, which Congress can change.

Common mistakes

• Over-contributing. Contributing above your limit, or contributing when your MAGI ends up above the phaseout, triggers a 6% excise tax on the excess for each year it stays in the account. Withdrawing the excess and its earnings before the filing deadline avoids the penalty.
• Leaving money in cash after it is deposited.
• Misreading the five-year rule. The clock starts from your first Roth IRA tax year, not from each new account, and conversions carry their own separate clocks.
• Skipping beneficiary designations, which can push the account into the estate and onto a less favorable distribution schedule.

Is a Roth IRA Worth It?

For many savers, yes. Beyond the tax-rate comparison above, a Roth IRA suits savers who want flexibility, since contributions stay accessible. This is one reason the account appears in many FIRE early-retirement strategies, which rely on accessing contributions and converted funds before 59½. It also suits anyone who wants to leave assets to heirs without forcing lifetime withdrawals.

A traditional IRA or traditional 401(k) may serve you better when you are in a high bracket now and expect a meaningfully lower one in retirement, or when you need the deduction today to afford saving at all. Many households split contributions between Roth and pre-tax accounts because no one knows their future tax rate with certainty.

FAQs

The Bottom Line

A Roth IRA matters most to savers who expect a higher tax rate later, younger workers with decades of growth ahead, and anyone who values access to contributions or wants to leave tax-free money to heirs. Savers in a high bracket now who expect a lower one in retirement may do better with a traditional account. Many households split contributions between Roth and pre-tax accounts because future tax rates are uncertain.