How a Roth IRA Is Taxed

A Roth IRA is funded with after-tax dollars, which means contributions aren’t deductible when they’re made. The benefit comes later: qualified withdrawals in retirement, including both contributions and investment growth, are generally free from income tax. This setup allows the account to grow without ongoing tax liability, provided that age and holding period rules are met.

Need help deciding whether a Roth IRA should be part of your retirement plan. Speak with a financial advisor and see how they can help you plan.

Understanding Roth IRA Taxes

Unlike other retirement accounts, Roth IRAs have a unique feature: They operate with after-tax dollars, meaning you’ve already settled your tax dues on the amount you invest into the account.

The Internal Revenue Code (IRC) sets rules for Roth IRAs. Here are several important things you should know about Roth IRA taxes:

Contributions: Since you contribute to a Roth IRA with money that you’ve already paid income tax on, your contributions are not tax-deductible in the year you make them.
Tax-free growth: Once the money is inside the Roth IRA account, it grows tax-free. This means you won’t owe any taxes on the earnings, dividends, or capital gains generated within the account as long as you follow IRS rules.
Qualified withdrawals: The main advantage of a Roth IRA is that qualified withdrawals in retirement are tax-free. To be considered qualified, the withdrawal must be made after age 59 ½ and the account must have been open for at least five tax years. If you meet these requirements, both your contributions and your earnings will be tax-free.
No required minimum distributions (RMDs): Unlike traditional IRAs and other retirement accounts that compel you to withdraw from your retirement accounts at age 73 (or 75 if you were born in 1960 or later), Roth IRAs do not mandate minimum distributions at any age. This means you can leave the money in the account to continue growing tax-free for as long as you want during your lifetime.

Understanding Roth IRA Contribution Taxes

A senior looking up the tax requirements for a Roth IRA.

Paying taxes on Roth IRA contributions upfront might seem counterintuitive. But in the long run, this strategy could pay off big as both your contributions and withdrawals will be tax-free (refer to IRS rules in the section above again for requirements).

So if you make consistent annual contributions of $7,000 starting at age 25, and see a 6% annual return, this can grow to well over $1 million in tax-free dollars by age 65.

If you’re currently in a lower tax bracket and expect to make more money later on, then it could make more sense for you to contribute to a Roth IRA now.

In this scenario, if you are in the 22% tax bracket during your work life and foresee a jump to the 32% bracket by the time you retire, you could benefit from the lower tax rate on your contributions now compared with contributing later.

Do You Ever Pay Taxes on Roth IRA Withdrawals?

While Roth IRA withdrawals are often described as tax free, there are circumstances where taxes or penalties can apply.

If you withdraw investment earnings before age 59 ½ and before meeting the five-year rule, those earnings may be subject to both income tax and a 10% early withdrawal penalty. Exceptions exist for certain situations, such as first-time home purchases, qualified education expenses, or unreimbursed medical bills.

Additionally, converting traditional IRA funds into a Roth IRA triggers income taxes at the time of conversion, even though future qualified withdrawals are tax free. Another nuance involves non-qualified distributions: if you take money out in a way that doesn’t meet IRS ordering rules, you could unintentionally tap earnings early and create a tax liability.

For heirs, inherited Roth IRAs are generally tax free, but beneficiaries must still follow distribution schedules under the SECURE Act, which may affect long-term tax planning.

Roth IRA Taxes vs. Traditional IRA Taxes

Understanding the key tax differences for both Roth and traditional IRAs will help you strategize when to use either account.

For traditional IRAs, you can get a tax deduction for contributions made today and pay income taxes on withdrawals later. For Roth IRAs, you can pay taxes on contributions upfront, and benefit from tax-free growth and withdrawals during your retirement.

Here’s a table with a fuller tax breakdown for each account:

Feature	Roth IRA Taxes	Traditional IRA Taxes
Contributions	Made with after-tax dollars, not tax-deductible	Made with pre-tax dollars, may be tax-deductible
Taxation of Growth	Earnings grow tax-free within the account	Investments grow tax-deferred, taxes paid upon withdrawal
Withdrawals	Qualified withdrawals (after age 59 ½, account open 5+ years) are tax-free, including contributions and earnings	Subject to ordinary income tax rates upon withdrawal, including contributions, earnings and deductible contributions
Required Minimum Distributions (RMDs)	No RMDs during the original account holder’s lifetime	RMDs must begin by age 73 (or 75 for people born in 1960 or later)
Penalty on Early Withdrawals	Earnings portion of non-qualified withdrawals subject to income tax and an additional 10% penalty, unless exceptions apply	Withdrawals before age 59 ½ may be subject to income tax and an additional 10% early withdrawal penalty, unless exceptions apply

Bottom Line

A senior reviewing how much her Roth IRA account has earned tax-free.

Roth IRAs can offer tax-free growth and withdrawals, no minimum distributions and other tax benefits that can be appealing to those who expect to be in a higher tax bracket. However, you should carefully consider your individual tax situation and retirement goals when deciding on a Roth or traditional IRA.

Tips for Tax Planning

A financial advisor who specializes in taxes can help you plan for certain tax situations while making a long-term tax plan. This can save you money and open up new investment opportunities. 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 expect to be in a different tax bracket next year, consider shifting income or deductions. For example, deferring a year-end bonus or accelerating deductible expenses like charitable contributions can reduce taxable income in higher-income years.