How Does a Roth IRA Work?

The direct answer: a Roth IRA is an individual retirement account you fund with money you have already paid tax on. It grows tax-free, and — if you follow two rules — you withdraw it tax-free in retirement. For 2026 you can contribute up to $7,500, or $8,600 if you are 50 or older, as long as your income is under $153,000 (single) or $242,000 (married filing jointly). This guide explains how each part works, what the 2026 limits and income caps are, the 5-year rule, and when a Roth beats a traditional IRA.

How does a Roth IRA work, step by step?

A Roth IRA has four moving parts, and the order matters:

1. You contribute after-tax money. There is no tax deduction for the contribution — unlike a traditional IRA, where the contribution is often deductible. You pay the tax now, once, at today's rate.
2. You invest it. The account is just a container; it earns nothing until you invest in funds, ETFs, or stocks inside it.
3. Growth is never taxed inside the account. Dividends, interest, and capital gains compound without a yearly tax bill — the whole point of the wrapper.
4. Qualified withdrawals in retirement are completely tax-free. "Qualified" has two conditions: you are 59½ or older, and the account has been open for at least five tax years (the 5-year rule, below).

One more feature makes the Roth unusually flexible: your contributions can come back out at any time, tax-free and penalty-free, because you already paid tax on them. Only the earnings are locked behind the age and 5-year conditions. That is why many people treat a Roth as both a retirement account and a backup emergency fund — though raiding it early defeats the compounding that makes it valuable.

2026 Roth IRA contribution limits

The IRS sets the limits each year in a cost-of-living notice. For 2026 (IRS Notice 2025-67, released November 13, 2025):

Three details people miss. First, the limit covers all your IRAs combined — $7,500 total across Roth and traditional IRAs, not $7,500 each. Second, you need earned income at least equal to what you contribute; a $5,000 salary caps you at $5,000. Third, the deadline is generous: contributions for 2026 can be made until April 15, 2027. The limits rose from $7,000 / $8,000 in 2025, and the catch-up rose from $1,000 to $1,100 — the first catch-up increase in years. Source: IRS Publication 590-A and IRS, "Roth IRAs".

The income limits: who can contribute in 2026

Unlike a 401(k), a Roth IRA has an income ceiling. Eligibility is measured on modified adjusted gross income (MAGI) — roughly your AGI with a few deductions added back — not your salary alone.

Inside the range your limit shrinks proportionally — it is a slope, not a cliff. Example: a single filer with MAGI of $160,500 is $7,500 into a $15,000-wide range, exactly halfway, so the $7,500 limit is cut in half to $3,750. Above the top of the range you cannot contribute directly at all, but the backdoor Roth still exists: make a nondeductible contribution to a traditional IRA and convert it to a Roth. It is legal and widely used, but watch the pro-rata rule — if you already hold pre-tax money in a traditional IRA, part of the conversion is taxed. See our backdoor Roth IRA guide for 2026.

Roth IRA vs. traditional IRA

The choice is really one question: will your tax rate be higher now or in retirement? Pay the tax in the cheaper year.

Young savers and early-career workers usually favour the Roth — their bracket is low now and likely to rise. Peak earners often favour the traditional, taking the deduction at a high rate. And the answer is frequently "both": a traditional 401(k) up to the employer match, then a Roth IRA. Run your own numbers in our Roth vs. traditional IRA calculator, or read the full comparison in Roth IRA vs. 401(k) in 2026.

The 5-year rule, explained simply

There are actually two 5-year clocks, and people mix them up. The first governs earnings: for earnings to come out tax-free, the account must have been open for five tax years and you must be 59½ or older (or meet an exception such as disability or a first-home purchase). The clock starts on January 1 of the first tax year you contributed — contribute in April 2027 for tax year 2026 and your clock still started January 1, 2026. The second clock applies to conversions: each Roth conversion has its own five-year wait before the converted amount can be withdrawn penalty-free if you are under 59½. Contributions themselves have no clock at all — they can come out any time, as above.

What you can take out, and when

The withdrawal rules follow the same split — contributions versus earnings:

• Contributions: any time, any age, no tax, no penalty.
• Earnings after 59½ (and 5 years): completely tax-free.
• Earnings before 59½: generally income tax plus a 10% penalty, with exceptions — a first home (up to $10,000 lifetime), higher-education expenses, disability, and birth or adoption ($5,000).
• No required minimum distributions (RMDs) during your lifetime, unlike a traditional IRA — under the SECURE 2.0 Act, Roth IRAs have no RMDs for the original owner, so the money can keep growing untouched. Your heirs do face withdrawal rules, but that is a different clock.

What $7,500 a year actually builds

Numbers make the tax-free growth concrete. Contribute the 2026 maximum of $7,500 every year from age 30 to 65 at a 7% average annual return, and you end up with about $1,036,777. Your contributions total $262,500; the other ~$774,000 is growth — and in a Roth, none of that growth is ever taxed. Start at 40 instead of 30 and the same $7,500 a year reaches only about $474,368 by 65. The ten-year head start is worth more than $560,000, which is the entire case for opening the account early even if you can only fund part of the limit. (Figures assume annual contributions at 7% compounded annually, before fees.)

One practical order of operations, if you also have a 401(k): contribute enough to capture the full employer match first — that is an instant 50–100% return no IRA can match — then fund the Roth IRA, then go back to the 401(k) if you still have room. See where you stand with our 401(k) calculator and retirement calculator.

Who should open one — and who should not

Open one if: you are early in your career or in a low bracket now; you expect your income (and bracket) to rise; you want tax-free income in retirement to pair with taxable 401(k) withdrawals; or you value flexibility — contributions accessible, no RMDs forcing withdrawals.

Think twice if: your income is above the phase-out (use the backdoor route, carefully); your bracket now is much higher than it will be in retirement (the traditional deduction may be worth more); or you need the tax deduction this year to afford saving at all. And if you are already retired with no earned income, you cannot contribute — earned income is a hard requirement, though a working spouse's income can qualify you through a spousal IRA.

How to open a Roth IRA

Open an account at any major brokerage — Fidelity, Vanguard, and Schwab are the usual low-cost choices — which takes about 15 minutes online. Fund it by April 15, 2027 for the 2026 tax year, and remember the account itself earns nothing until you invest: pick a low-cost index fund or target-date fund and set up automatic monthly contributions. Even $200 a month from age 30 beats $7,500 a year started at 45 — the clock matters more than the amount.

The one number to check this week: your MAGI against the 2026 phase-out ranges above. If you are under the line, the only decision left is how much to put in — and the only wrong answer is waiting a year to decide.