How a Roth IRA Works and When to Get One

A Roth IRA is an individual retirement account funded with after-tax dollars. You can’t deduct contributions to a Roth IRA at tax time, but you can withdraw your money tax-free in retirement. A Roth IRA is a popular choice for young people just starting out in their careers. Many work with a financial advisor to optimize their retirement strategy. Let’s take a look at the Roth IRA and break down how it could fit into your retirement goals.

Understanding How a Roth IRA Works

Today you have many choices to save for retirement. One popular retirement investment vehicle is the Roth IRA. You fund a Roth IRA with after-tax dollars and don’t deduct your contributions when you file your tax returns. That’s good news and bad news, depending on how you look at it. The bad news is that you don’t get a tax break now. The good news is that you get a more valuable tax break down the road (aka after you turn 59 1/2). Why? Because you won’t have to pay income tax on either the money you originally contributed or the money you’ve earned over years in the market.

The younger you are, the more you stand to gain from opening a Roth as part of your retirement savings plan. Any money you contribute now will have more years of compounding and growth. That means you’re getting a bigger tax break when you start taking distributions in retirement than you would if you opened a Roth at age 50.

Another advantage of the Roth is that it doesn’t come with required minimum distributions (RMDs) while the owner of the account is alive. That means you don’t have to start taking money out of your Roth IRA at a certain age as you would with a traditional IRA.

When to Start Taking Your RMDs

As of Jan. 1, 2023, the age at which you must start taking RMDs has increased. The newly enacted law provides that if you turned 73 in 2023, you have April 2024 to begin withdrawing from your account. The act also provides that the age rises to 74 in 2029 and rises to 75 beginning in 2033.

Depending on your circumstances, the lack of RMDs could be a big advantage. If you’re already getting enough income from a combination of Social Security and a 401(k), having a regular IRA would require you to take distributions that could push you into a bigger tax bracket. With a Roth IRA, you won’t run into the problem of having to take money you don’t need only to be slammed with a bigger tax bill.

Weighing Other Pros and Cons

Here are some of the most important other pros and cons to consider.

While you can withdraw money that you contributed to a Roth IRA without taxes or a 10% penalty, you could end up paying both if you take out investment earnings before turning 59 1/2 or if the account is less than five years old.
If you make an early withdrawal before 59 1/2, you will have to pay income taxes on the earnings, but you can avoid paying a 10% penalty as long as you withdraw the money for a specific need like investing in a first home, or paying for education expenses, and other qualifying exceptions.
If you withdraw money at 59 1/2 or older, you can take out the earnings without owing taxes or a 10% penalty. However, if you owned the Roth IRA account for less than five years, you will still have to pay income tax but no penalty.

Roth IRA Eligibility

Roth IRAs were not designed for wealthy savers. In fact, there is an income cap on Roth IRA eligibility. The IRS income rules for Roth IRAs use your modified adjusted gross income (AGI) as a guide. This is simply the total of all your taxable income, minus certain qualified deductions, such as those for medical expenses and unreimbursed business costs.

The IRS sets an income eligibility range for Roth IRAs that tells you whether you can make:

The maximum contribution to a Roth IRA ($7,000 for tax year 2025, and $8,000 if you are age 50 or older)
A partial contribution
No contribution

For 2025, the AGI phase-out range for a married couple filing jointly is $236,000 – $246,000. For single filers, the range is $150,000 – $165,000.

If your income falls below those ranges, you can contribute the full amount to a Roth IRA. And if it’s within the range, you are subject to contribution phase-out rules, meaning you won’t be able to contribute the full amount. If your income is above the top of the phase-out range, IRS rules prohibit you from contributing to a Roth IRA.

The Backdoor Roth

If you are above the IRS income range, it is still possible to take advantage of Roth IRA tax benefits through a workaround called the “backdoor Roth.”. To create a backdoor Roth, you first contribute to a traditional IRA and then convert it to a Roth IRA. This will allow you to get around the contribution limits and avoid paying taxes on earnings.

This IRS-approved strategy may appeal to savers who are doing well financially,and have a 401(k) through your employer, and who want to diversify their tax burden in retirement.

How a Roth IRA Fits Into Different Retirement Strategies

A Roth IRA can work as part of a broader retirement plan that includes other savings tools, such as 401(k) plans, traditional IRAs, HSAs and taxable brokerage accounts. Since Roth contributions are made with after-tax dollars, they can balance the pre-tax savings from accounts like a 401(k) or traditional IRA. This can offer greater flexibility in retirement to choose which accounts to draw from, helping you manage your taxable income in any given year.

In years when your income is lower—such as early in your career, during a job change or after partial retirement—it may make sense to prioritize Roth contributions, since you’re paying taxes at a lower rate now for future tax-free withdrawals. In higher income years, you might focus more on pre-tax contributions to reduce your current tax bill, then use Roth conversions strategically in lower income years.

Roth IRAs can also pair well with other retirement income sources. For example, if you have a pension or Social Security benefits that already covers your basic needs, you can use Roth withdrawals for discretionary spending without increasing your taxable income. This can help you avoid moving into a higher tax bracket or triggering additional Medicare surcharges.

Finally, because Roth IRAs don’t mandate RMDs during your lifetime, they can be a useful estate planning tool. You can leave Roth funds to heirs, who can take tax-free withdrawals. This adds another layer of flexibility to your overall retirement and legacy strategy.

Bottom Line

A woman leaves a coffee shop with a coffee.

Having a Roth IRA in your financial arsenal gives you more flexibility in retirement. You don’t have to take (and pay taxes on) Required Minimum Distributions if you don’t want to. And any money you do take out of your Roth IRA (that is a qualified distribution) is completely free from federal taxes?

If you are tempted to open a Roth IRA, it’s important to look for a provider offering low fees. Higher fees mean less money for you and more money for the financial institution hosting your investments. Fees can cost investors tens of thousands of dollars over the course of their working years, so it pays to shop around and get the best deal you can.

Tips for Getting Retirement Ready

Industry experts say that people who work with a financial advisor are twice as likely to meet their retirement goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to set up and plan your retirement goals, SmartAsset’s retirement calculator can help you figure out how much you will need to save to retire comfortably.
Another easy way to save for retirement is by taking advantage of employer 401(k) matching. SmartAsset’s 401(k) calculator can help you figure out how much you will have based on your annual contribution and your employer’s matches.