The only certainties in life are death and taxes—unless you own a Roth IRA. These individual retirement accounts are one of the rare ways to generate completely tax-free income in the US, no matter how big your nest egg grows. In fact, venture capitalist Peter Thiel, an early investor in PayPal and Facebook, turned a $2,000 contribution to his Roth IRA back in 1999 into more $5 billion…and he won’t owe a penny to the IRS.
About a quarter of American households now own Roth IRAs totaling $1.4 trillion in assets, according to a survey from the Investment Company Institute, a leading association representing the asset-management industry and about 30,000 investment funds.
“Roth IRAs are no-brainers for younger people with decades of tax-free growth ahead of them,” says IRA expert Ed Slott. “But Roth IRAs do come with some significant restrictions and drawbacks including income limits. As you get near to and into retirement, contributing to a Roth remains useful, but the choice gets trickier.”
Bottom Line Personal asked Ed Slott to take a deep dive into Roth IRAs and explain how to determine if they are right for you…
HOW A ROTH IRA WORKS
Created by Congress by the Taxpayer Relief Act of 1997 and effective starting in 1998, Roth IRAs work similarly to traditional IRAs—only in reverse. Like a traditional IRA, you must have earned income and cannot contribute more than you’ve earned in a given year. There also is maximum total amount you are allowed to contribute each year across all your retirement accounts. But a traditional IRA offers an upfront tax break—contributions are deductible in the year they are made, but when you withdraw money in retirement, you owe income taxes. With a Roth IRA, you make contributions with after-tax dollars and avoid taxes on qualified withdrawals.
ADVANTAGES OF A ROTH IRA
Tax-free withdrawals: If you take distributions from a Roth IRA after age 59½ and have had the account for at least five years (measured from January 1 of the year in which the account began), you generally don’t owe tax on either the contributions or any investment growth earnings.
No penalty for withdrawal of contributions
If you have a sudden need for money, you can withdraw your original contributions at any time and for any reason without incurring a penalty since they were made with after-tax dollars.
No required minimum distributions (RMDs)
With a traditional IRA, you must begin to withdraw money when you reach age 73. Roth IRAs don’t require annual RMDs during your lifetime.
DISADVANTAGES OF A ROTH IRA
No upfront tax break: You get less money in your paycheck to save and invest, which can mean significant opportunity costs over the long term. Exception: Low- and middle-income individuals who contribute to a Roth IRA and meet eligibility requirements may qualify for a saver’s tax credit, worth up to $1,000 for individuals or $2,000 for married couples filing jointly.
Contribution limits
In 2026, you can contribute $7,500 to a Roth IRA…or $8,600 if you’re 50 or older, which includes a $1,100 catch-up contribution. Note: This is the total amount you can contribute to all of your IRAs annually. In addition, your modified adjusted gross income (MAGI) determines whether you can contribute fully, partially or not at all to a Roth IRA. Example: If you file your taxes for 2026 as married jointly, the phase out begins with a MAGI of $242,000 and no contributions are allowed if your MAGI is more than $252,000.
CAVEATS TO USING A ROTH IRA
Choosing to contribute to a traditional IRA rather than a Roth IRA involves a tradeoff, depending on factors including how you envision your spending and tax liability in retirement. Example: If you are currently in a high tax bracket but are likely to reduce spending and drop to a much lower bracket in retirement, a traditional IRA can make sense. But if you plan to spend nearly as much in retirement as during your working years, have ample income and believe IRS tax bracket rates are likely to be higher in the future, a Roth IRA can be a smarter option since you can save far more on withdrawal taxes than you paid up front.
Converting a traditional IRA to a Roth IRA can reduce your overall taxes in retirement. How it works: The IRS allows you to convert a conventional IRA to a Roth IRA as long as you pay taxes on the amount at your current income tax bracket in the year you do the conversion. The money continues to grow tax-free and avoids RMDs. You can spread these conversions over multiple years to reduce any immediate tax impact. To avoid a 10% penalty on distributions before 59½, the converted amount (excluding earnings) must be in your Roth account for at least five years. Note: Five years is counted from January 1 of the year in which you make the conversion, regardless of the actual date of the conversion. A separate five-year holding period applies to each conversion you make from a traditional to a Roth IRA.
Why it’s worth it: Roth conversions give you more flexibility to juggle your sources of annual income from various accounts including taxable and traditional and Roth retirement accounts. This allows you to fine-tune your tax liability and avoid generating income that pushes you into a higher tax bracket, especially once you start taking RMDs. This approach also can minimize side effects such as higher Medicare premiums and increased taxation of Social Security benefits, which are tied to your annual AGI. Example: To meet your expenses in a given year, you collect your Social Security benefits, then take just enough money from your traditional 401(k) until your taxable income reaches near the very top of your marginal tax bracket (making sure to take all of any required RMD). If you require more money that year, you can tap your Roth IRA because withdrawals don’t count as taxable income.
If your annual income is too high to contribute to a Roth IRA, consider two other Roth-related options…
Roth 401(k)
Ninety percent of employer retirement plans now offer Roth 401(k)s. Unlike a Roth IRA, there are no annual income restrictions and many employers offer to match a portion of your contributions. Contributions are made through payroll deductions and are much higher than for IRAs. For 2026, the maximum limit is $24,500. If you are 50 or older, you can make an additional $8,000 in catch-up contributions (a total of $32,500). New for 2026: High earners—those who earned more than $150,000 in 2025—are required to make any catch-up contributions to workplace retirement plans on an after-tax Roth basis.
“Backdoor” Roth IRA.
This strategy involves contributing non-deductible money to a traditional IRA, then immediately converting it to a Roth IRA. This allows you to bypass direct Roth IRA income-contribution limits.
Leave your Roth IRA to your heirs
If you don’t need the money during your lifetime, Roths can be an effective estate-planning tool. Upon your death, your spouse can treat the inherited Roth IRA as his/her own and roll it into a personal Roth IRA. The spouse will not be required to take any minimum distributions during his lifetime. Non-spouse beneficiaries such as children can withdraw earnings tax-free as long as the original account has been open for at least five years. Most non-spouse beneficiaries must empty the account by December 31 of the 10th year following the owner’s death. If the original owner died on or after their “required beginning date” (generally age 73 or 75, depending on birth year), and the beneficiary is not an “eligible designated beneficiary,” annual RMDs must be taken in years one through nine, with the balance cleared by year 10. If the owner died before their required beginning date, no annual RMDs are required, only that the account is emptied within 10 years. Other considerations: The 10% early-withdrawal penalty does not apply to inherited IRAs…some beneficiaries, such as minor children (until they reach the age of 21), disabled individuals and those not more than 10 years younger than the original owner, may be subject to different rules, such as taking distributions over their life expectancies.
Roll over leftover money in 529 college-savings plans to a Roth IRA
Many parents and grandparents worry about having leftover funds in their 529 plans. If the money isn’t used for qualified education expenses, any distributions typically faced penalties and taxes. That changed in 2024, when the federal government began allowing penalty-free and tax-free rollovers into Roth IRAs owned by the 529 plan account owners. Restrictions: The 529 plan must have been open for at least 15 years…there is a lifetime cap of $35,000 on the rollover amount…the annual rollover amount is limited to the annual Roth IRA contribution limit…you must have earned income at least equal to the amount of the rollover for that year…contributions (and their resulting earnings) that were made to the 529 plan within the last five years aren’t eligible for the rollover.
