Roth IRA basics

Part of Financial 101 — free, plain-language reference guides. Not personalised advice. Download the one-page Order of Operations checklist.

In one sentence

A Roth IRA is a retirement account you open yourself, fund with money you have already paid tax on, and from which every dollar of growth can eventually be withdrawn tax-free — which makes it the most flexible and, for most people, the most valuable account available.

Why it is so widely recommended

Three properties combine here that no other account offers together.

Tax-free growth and withdrawals. Decades of gains come out untaxed in retirement. For a young investor with a long horizon, the tax saved on growth can dwarf the tax paid on contributions.

Contributions are always accessible. You can withdraw the money you put in (not the earnings) at any time, for any reason, with no tax or penalty. This makes a Roth IRA a reasonable backstop behind an emergency fund — not a replacement for one.

No required withdrawals. Unlike traditional accounts, you are never forced to take money out during your lifetime, so it can keep compounding and pass to heirs efficiently.

The trade-off is that you get no tax deduction today. That is a good trade when your current tax rate is lower than the rate you expect in retirement, which describes most people early in their careers.

2026 limits and eligibility

Item	2026 figure
Contribution limit, under 50	$7,500
Contribution limit, 50+	$8,600 (includes $1,100 catch-up)
Income phase-out, single / head of household	$153,000 – $168,000
Income phase-out, married filing jointly	$242,000 – $252,000
Deadline for 2026 contributions	The April 2027 federal tax deadline

The contribution limit is shared across all your IRAs, traditional and Roth combined. You need earned income at least equal to what you contribute. Above the phase-out range you cannot contribute directly — though a “backdoor” route via a non-deductible traditional IRA conversion exists and is legal, with a tax trap (the pro-rata rule) for anyone who already holds pre-tax IRA money. That deserves its own guide, or a conversation with a tax professional.

Roth IRA vs traditional IRA

A traditional IRA works like a traditional 401(k): a deduction now, tax later. But the deduction phases out at moderate incomes if you or your spouse have a workplace plan, which makes it less useful than it sounds for many earners. The simplest framing: if you can deduct a traditional contribution and expect a lower tax rate in retirement, traditional edges ahead; if you cannot deduct it, the Roth is almost always better; and if you are unsure, the Roth’s flexibility is worth a lot.

Roth IRA vs Roth 401(k)

Same tax treatment, different container. The 401(k) has higher limits and possibly a match; the IRA has unlimited investment choice, often lower costs, and accessible contributions. Most people should do both in the order the order of operations suggests: match first, then IRA, then the rest of the 401(k).

How to open one and what to hold

Any major low-cost brokerage will open one in minutes with no minimum. Then — and this is the step people forget — invest the money. Cash sitting uninvested in a Roth IRA is the most common error on this page. A single total-market index fund or a target-date fund is a complete, defensible choice; see the three-fund portfolio guide. Automate a monthly contribution and stop thinking about it.

Common mistakes

Contributing and never investing. Covered above; check your account.

Withdrawing earnings early. Contributions come out free; earnings before 59½ and before the account is five years old are generally taxed and penalised, with specific exceptions.

Over-contributing. Exceeding the limit triggers an annual penalty until corrected. If your income jumps mid-year, check the phase-out before the last contribution.

Not naming a beneficiary. A two-minute task that avoids probate.

Checklist

Account opened at a low-cost brokerage · Monthly contribution automated · Money actually invested · Income checked against the phase-out · Beneficiary named · Contributions tracked so you know your accessible basis.

Related: 401(k) basics · Emergency fund · Index funds