How a Roth IRA works
Contributions are not deductible. The account can hold eligible investments chosen by the owner, subject to provider offerings and tax rules. Qualified distributions may be tax-free. Opening an IRA does not automatically invest the cash deposited; you generally need to choose investments separately.
Who can contribute?
You generally need taxable compensation, and direct Roth IRA contributions are subject to modified adjusted gross income limits. Eligibility and the allowed amount depend on filing status and current-year rules. Participating in a workplace retirement plan does not by itself prevent an IRA contribution.
Roth IRA versus traditional IRA
| Roth IRA | Traditional IRA | |
|---|---|---|
| Contributions | Not deductible | May be deductible, subject to rules |
| Qualified withdrawals | May be tax-free | Deductible contributions and earnings generally taxable when distributed |
| Owner RMDs | No lifetime required minimum distributions for the original owner under current rules | Required minimum distribution rules apply |
| Income limits | Direct contribution eligibility phases out | Deduction may phase out; contribution eligibility differs |
Contributions, conversions, and earnings are different
Roth distribution ordering and tax rules can be complex. Regular contributions, conversions, and earnings do not receive identical treatment. The five-year rules and age or exception requirements matter when determining whether a distribution is qualified. Consult current IRS Publication 590-B and professional tax guidance for a real withdrawal decision.
Before opening or funding a Roth IRA
- Confirm taxable compensation and current income eligibility.
- Check the combined IRA contribution already made for the year.
- Compare provider fees, available investments, service, and account protections.
- Select an investment approach aligned with time horizon and risk capacity.
- Name beneficiaries.
- Keep contribution and conversion records.