What is a Roth IRA & How It Works?

Roth IRAs are a popular retirement option—but they can be confusing. This guide breaks down the basics so you can decide if a Roth IRA fits your financial goals.

What is a Roth IRA?

A Roth IRA is an individual retirement account that has advantages as an investing tool over a traditional IRA for many of us.

The Roth IRA and the traditional IRA are the most popular types of retirement accounts.  Named after Senator William Roth of Delaware, who sponsored the legislation that led to its creation, the Roth IRA has existed for more than 20 years. 

How Does a Roth IRA Work?

Unlike contributions to traditional IRAs, contributions to your Roth IRA are not tax-deductible. It is crucial to remember not to deduct any of your Roth IRA money when you file your taxes.

The benefits come down the road when you start withdrawing your cash because then it is tax-free. You will need to wait until you reach age 59 ½ to access all of your money, however.

Your Roth IRA will benefit you the most if you invest the funds. You have many choices of how to invest, including mutual funds or stocks and bonds, among others.

And you will want to add money each year so that your retirement fund can continue to grow.

Distributions & Withdrawals

In 2025, the maximum contribution is $7,000 if you’re under 50. If you’re 50 or older, it is $8,000. Those 50 and older will be able to catch up a bit even if they neglected to start the process earlier.

• Withdraw contributions anytime—tax and penalty-free.
• Withdraw earnings before 59½ and before 5 years? You may owe taxes and a 10% penalty.

Exceptions: First home purchase, education, adoption, disability, and certain emergencies (e.g., COVID-19 under the CARES Act).

In the unfortunate event that you needed to take this route, you would have three years to put the money back in your Roth IRA.

Roth IRA Limits in 2025

Sometimes the rules for retirement accounts can change, but here’s what you currently need to know.  To fully understand how a Roth IRA works, you need to learn about the MAGI. 

Your ability to contribute depends on your Modified Adjusted Gross Income (MAGI):

• Married filing jointly: Full contribution under $246,000
• Single or married filing separately: Full contribution under $150,000
• Spousal IRA: You can contribute for a non-working spouse using a separate account.

Roth IRA vs. Traditional vs. 401(k)

With a traditional IRA or 401(k), you get your tax deduction at the time you make your contribution. That makes the conventional IRA seem attractive to a lot of people.

Account Type	Tax Now	Tax Later	RMDs Required?
Roth IRA	Yes	No	No
Traditional IRA	No	Yes	Yes
401(k)	No	Yes	Yes

Currently, you can even wait until the tax deadline to add money for the last calendar year.  You can even save money on future Social Security and Medicare expenses.

• Roth IRA withdrawals won’t impact your Social Security or Medicare premiums.
• You can contribute to both a Roth IRA and a 401(k).
• 401(k) limit in 2025: $23,500

How to Open a Roth IRA Account

Here are the 5 steps you should take if you want to open a Roth IRA account:

1. Confirm eligibility – You must have earned income below the IRS limit.
2. Gather info – SSN, government-issued ID, and bank details.
3. Compare providers – Look at online brokers, banks, and robo-advisors.
4. Choose investments – Stocks, mutual funds, ETFs, etc.
5. Start contributing – Regular contributions help your money grow.

Next Steps

Let’s recap. A Roth IRA is a retirement account where you save your money and pay taxes on it now, then reap the benefits of tax free withdrawals in the future.

Roth IRAs are ideal for long-term, tax-free retirement growth—especially for younger or higher-earning investors in the future. Even if you’re new to retirement planning, getting started now will pay off later.

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