What Is a Roth IRA? How It Works, 2026 Limits and Rules

What Is a Roth IRA?

A Roth IRA is a tax-advantaged retirement account that you open yourself, separate from any workplace plan. You put in money you have already paid income tax on. In return, the money inside can grow without being taxed, and qualified withdrawals in retirement are tax-free.¹²

“IRA” stands for individual retirement arrangement, the term the IRS uses. “Roth” comes from Senator William Roth, who championed the account in the Taxpayer Relief Act of 1997. The first Roth IRAs became available in 1998.

A Roth IRA is not an investment in itself. It is a container with special tax rules. Inside it you choose what to hold, such as index funds, individual stocks, bonds or cash. Our explainer on index funds covers one of the most common choices.

The trade is simple to state. With a Roth IRA you pay tax now and, if you follow the rules, never pay tax on that money again. With a traditional IRA or a regular 401(k), you usually get a tax break now and pay tax when you take the money out.

How a Roth IRA Works, Step by Step

Using a Roth IRA comes down to four steps: open, fund, invest and leave it to grow.

1. Open an account. Banks, brokerages and robo-advisors offer Roth IRAs. You need basic personal details and a bank account to fund it.
2. Contribute. You add money up to the yearly limit. Contributions for a tax year can be made until the tax filing deadline the following spring, usually around April 15.¹
3. Invest the money. Cash sitting in the account does not grow much on its own. You pick investments, or choose an all-in-one fund such as a target-date fund.
4. Let it compound. Interest, dividends and gains stay inside the account untaxed. Over decades, that tax-free growth can be the largest part of the balance.

The growth is where the value lies. Our explainer on compound interest shows why money left alone for decades can grow far beyond what you put in. In a Roth IRA, that growth is not taxed when you withdraw it in retirement.

Roth IRA Contribution Limits for 2026

For 2026 the most you can put into all your IRAs combined is $7,500, plus a $1,100 catch-up if you are 50 or older. These figures come from the IRS cost-of-living update in Notice 2025-67.³

The limit is shared. If you have both a traditional IRA and a Roth IRA, the total you add to both cannot pass the yearly cap. Workplace plans such as a 401(k) have their own, much higher limits and do not count against your IRA limit.

You also need earned income, such as wages or self-employment profit. You cannot contribute more than you earned that year. A spouse with little or no income can still have a Roth IRA funded through a spousal IRA, if the couple files jointly and the working spouse earns enough to cover both.¹

Who Can Open a Roth IRA? The Income Rules

Anyone with earned income can open a Roth IRA, but high earners can contribute less or nothing at all. The IRS uses your modified adjusted gross income (MAGI) to decide.¹

Below the bottom of the phase-out range, you can contribute the full amount. Inside the range, your allowed amount shrinks step by step. Above the top of the range, you cannot contribute directly for that year.

There is no age limit. Teenagers with summer job income can open one, often as a custodial Roth IRA managed by a parent. Older workers can keep contributing for as long as they have earned income.

People above the income limits sometimes use a route known as a “backdoor Roth.” They contribute to a traditional IRA, then convert it to a Roth IRA. Conversions have tax rules of their own, including the pro-rata rule for existing pre-tax IRA money, so this is worth discussing with a tax professional first.²

Roth IRA Withdrawal Rules

The withdrawal rules separate your contributions from your earnings, and that split decides what you owe. This is the part most people find confusing, so it helps to take it piece by piece.²

• Your contributions: the money you put in can be taken out at any time, for any reason, without tax or penalty. You already paid tax on it.
• Your earnings: growth on that money is tax-free only in a “qualified distribution.” That generally means the account has been open at least five tax years and you are 59½ or older.
• Early earnings withdrawals: if you take out earnings before meeting those tests, you may owe income tax and an extra 10% penalty tax, apart from in the cases the IRS exempts.

The IRS treats withdrawals in a set order. Contributions come out first, then converted amounts, then earnings. In practice, many people can reach their own contributions years before retirement without any tax bill.²

Some exceptions allow earnings to come out early with less or no penalty. Examples include a first home purchase (capped at $10,000 over your lifetime), disability, and certain other cases listed in IRS Publication 590-B. The rules are specific, so check the publication or a professional before relying on one.

The Five-Year Rule in Plain English

The five-year clock starts on January 1 of the tax year of your first Roth IRA contribution. If you contribute in March 2027 for tax year 2026, your clock starts on January 1, 2026. Opening a Roth IRA early, even with a small amount, starts the clock sooner.

Roth IRA vs Traditional IRA

Both accounts offer tax help, but at opposite ends of your life: Roth now, traditional later.

The usual rule of thumb: a Roth tends to suit you if you expect your tax rate in retirement to be the same or higher than today. A traditional IRA tends to suit you if you expect a lower rate later. Our explainer on how income tax brackets work helps you think about which bracket you are in now.

Nobody knows future tax rates for sure. That uncertainty is why some people hold both types. Having both gives you a choice each year in retirement about which account to draw from.

Our full guide to Roth vs traditional IRA works through the decision with 2026 figures and a worked example.

Roth IRA vs Roth 401(k)

A Roth 401(k) uses the same after-tax idea, but inside a workplace plan with much higher limits. If your employer offers one, you can choose Roth contributions through payroll.

The key differences are size and control. A Roth 401(k) has the much larger employee limit that applies to all 401(k) contributions and no income limit. A Roth IRA has a lower limit but gives you a wider choice of investments and providers.

Many people use both. A common order is to contribute to the 401(k) up to any employer match first, because the match is extra money. Then they fund a Roth IRA, and then return to the 401(k) if they can save more.

What to Invest In Inside a Roth IRA

Because the growth is tax-free, many people hold their highest-growth, longest-term investments in a Roth IRA. The account itself does not decide your returns. Your choice of investments does.

• Target-date funds: one fund that holds a mix of stocks and bonds and becomes more cautious as your retirement year approaches.
• Broad index funds: low-cost funds that track a whole market, such as the S&P 500 or a total stock market index.
• Bond funds: lower expected returns, but steadier, often used as retirement gets closer.
• Cash or money market funds: useful as a parking spot, but not for long-term growth.

Costs matter over decades. The SEC’s investor education office notes that even small differences in fees can add up to large sums over long periods.⁴ Look at each fund’s expense ratio before you buy.

Inflation matters too. Money held as cash in a retirement account can lose buying power over time. Our explainer on inflation shows why long-term savers usually need some growth investments.

A Worked Example

Here is a made-up example to show how the tax-free growth adds up, using round numbers.

Maya is 30. She contributes $7,500 a year to a Roth IRA and invests it in a broad index fund. Assume an average return of 6% a year after fees, which is an assumption, not a promise. Real returns vary year to year and can be negative.

After 35 years, at age 65, she would have contributed $262,500. If she invests at the start of each year at a steady 6%, the account would grow to roughly $886,000. That means around $623,000 is growth.

In a Roth IRA, if her withdrawals are qualified, she pays no federal income tax on any of it. In a regular taxable account, she would likely owe tax on dividends along the way and on gains when she sells. You can try your own numbers in our compound interest calculator.

Common Mistakes to Avoid

Most Roth IRA problems come from a few avoidable errors.

• Leaving money in cash. Contributions often land in a cash position. If you never choose investments, the money barely grows.
• Contributing too much. Excess contributions face a 6% tax each year they stay in the account. Remove the excess, plus its earnings, before your filing deadline to avoid it.¹
• Ignoring the income limits. A raise or bonus can push you into the phase-out range. Check your expected income before the year ends.
• Withdrawing earnings too early. Taking growth out before age 59½ and the five-year mark can mean tax and a penalty.
• Missing the deadline. You cannot make up a missed year later. The window for each tax year closes at the filing deadline.

How to Open a Roth IRA

Opening a Roth IRA usually takes less than an hour online.

1. Choose a provider. Compare account fees, fund choices and minimum deposits. Many large brokerages have no account fee and no minimum.
2. Gather your details. You need your Social Security number, address, date of birth and bank details.
3. Name a beneficiary. This decides who receives the account if you die, and it can override your will for this account.
4. Fund it. Make a one-time deposit or set up automatic monthly transfers.
5. Pick investments. Choose a target-date fund or a simple mix of index funds, then review once a year.

Before investing for retirement, most guidance suggests having some cash set aside for surprises and paying off high-interest debt. Our explainers on emergency funds and APR cover both.

Key Terms Explained

• Earned income: pay from work, such as wages, salary, tips or self-employment profit.
• MAGI: modified adjusted gross income, the figure the IRS uses for the Roth income limits.
• Qualified distribution: a withdrawal that meets the five-year and age or other tests, making it tax-free.
• Roth conversion: moving money from a traditional IRA or plan into a Roth, usually paying tax on the amount moved.
• Required minimum distribution (RMD): the minimum amount some retirement accounts must pay out each year from a set age.

The Bottom Line

A Roth IRA lets you pay tax now so your retirement money, and all its growth, can come out tax-free later. For 2026 you can add up to $7,500, or $8,600 at 50 and over, if your income is within the limits. Start early to start the five-year clock, invest the money rather than leaving it in cash, and keep an eye on the withdrawal rules. For more, browse our investing explainers.

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