Roth IRA — The Tax-Free Wealth Builder

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a retirement savings account you open yourself — not through an employer. You contribute money you've already paid taxes on, and in exchange, the IRS lets your investments grow completely tax-free.

The magic of a Roth IRA is the back-end tax break. Unlike a 401(k) or Traditional IRA, you get no deduction today — but every dollar you withdraw in retirement (including decades of gains) is 100% tax-free.

How It Works

Contribute after-tax dollars

You fund your Roth IRA with money you've already paid income tax on. No deduction now — but the payoff comes later.

Invest and let it grow

Your contributions are invested in stocks, bonds, ETFs, or mutual funds. All growth is completely tax-free inside the account.

Withdraw tax-free in retirement

After age 59½ and once the account is 5 years old, you can withdraw everything — contributions and earnings — completely tax-free.

2025 Contribution & Income Limits

Income Phase-Out (MAGI)

Above the phase-out range, you cannot contribute directly. Look into the Backdoor Roth strategy.

Pros & Cons

Pros

• Tax-free growth — no taxes on gains ever
• Tax-free withdrawals in retirement
• Contributions (not earnings) can be withdrawn anytime penalty-free
• No Required Minimum Distributions (RMDs) during your lifetime
• Great for younger savers in lower tax brackets

Cons

• No upfront tax deduction like a Traditional IRA
• Income limits — high earners may not qualify directly
• Annual contribution limits are relatively low
• Earnings withdrawn early may face taxes + 10% penalty

Key Terms

Roth IRA

An individual retirement account where you contribute after-tax dollars. Your money grows tax-free and qualified withdrawals in retirement are completely tax-free.

After-Tax Contributions

You pay income tax on the money before putting it into a Roth IRA — but you'll never pay taxes on that money or its growth again.

Income Limit (MAGI)

The IRS restricts Roth IRA contributions based on your Modified Adjusted Gross Income. Above a certain threshold, your contribution limit phases out.

5-Year Rule

To withdraw earnings tax-free, your Roth IRA must be at least 5 years old AND you must be 59½ or older.

Roth IRA vs Traditional IRA — Quick Look