Roth IRA

A Roth IRA is the traditional IRA turned around. The money goes in from take-home pay, with no deduction, and in exchange nothing the account earns is ever taxed as long as the withdrawal is qualified: the account has been open at least five years and you have reached the age the IRS sets. Because the contributions were taxed on the way in, they can be taken back out at any time, at any age, without tax or penalty; only the earnings have to wait. The IRS sets an annual limit on contributions, shared with any traditional IRA, and an income level above which you cannot contribute directly.

In a sentence

• "She puts $400 a month into her Roth IRA from take-home pay, and in thirty years everything it has grown to comes out untaxed."
• "A traditional IRA gives you the tax break now. A Roth IRA gives it to you later."
• "He earns too much to contribute to a Roth IRA directly, so he funds a traditional IRA and converts it."

How it works

1. Open it and contribute after-tax money from earned income, at a brokerage or bank, choosing the investments yourself. Nothing is deducted on your tax return.
2. Stay within the limits the IRS sets: an annual contribution limit shared with a traditional IRA, and an income level above which the amount you may contribute directly phases down to zero. A conversion from a traditional IRA is allowed at any income, with tax due on the pre-tax part that year.
3. The investments grow without yearly tax on the dividends, interest and gains inside the account.
4. Contributions come out first, and freely. Withdrawals count as contributions until everything you put in has been withdrawn, and those are never taxed or penalized.
5. Earnings come out tax-free when qualified: the account has been open at least five years and, in addition, you have reached the age the IRS sets, become disabled, or are buying a first home, up to an amount the IRS caps. Earnings withdrawn before that are taxed as income and, with exceptions, carry a 10% penalty.
6. No withdrawals are ever required during your lifetime, unlike a traditional IRA, which must be drawn down from an age the IRS sets.

An example

$400 a month for thirty years at the example's assumed 6% annual return, in each kind of IRA, with the example's assumed 20% tax rate both now and in retirement.

The Roth costs $80 more of take-home pay each month, $28,800 over thirty years, and delivers $80,361 more at the end, because the tax was paid on the $144,000 contributed rather than on everything it grew into. The comparison is fair only if the traditional saver spends the $80 a month; invested at the same return with the same tax treatment it would also reach $80,361, and at the same tax rate now and later the two come out even. The Roth wins when your rate in retirement is higher than now, and the traditional when it is lower.

Why it matters

The Roth choice is a bet on tax rates: yours today against yours in retirement. Early in a career, when income and the rate on it are usually lowest, paying the tax now is cheap and the decades of growth come out untouched; later, at a higher rate, the traditional deduction is worth more. The account also does two things no other retirement account does: its contributions can be reached in a bad year without tax or penalty, which makes it a backup to the emergency fund rather than a substitute for one, since a withdrawn contribution cannot be put back beyond the year's limit; and it is never forced to pay out, so whatever is left keeps growing tax-free for as long as you live.

Roth IRA versus traditional IRA

The difference is when the tax is paid. A traditional IRA deducts the contribution now, when eligible, and taxes every dollar withdrawn later; a Roth IRA takes no deduction and taxes nothing later, once the withdrawal is qualified. The traditional requires withdrawals from an age the IRS sets, and the Roth never does. Which is better turns on your tax rate now against your expected rate in retirement: a higher rate later favors the Roth, a lower one the traditional, and a household unsure of the answer often holds some of each.

Common questions

Is a Roth IRA the same as a traditional IRA? No. Both are individual retirement accounts sharing one annual limit, but a traditional IRA is taxed on the way out and a Roth IRA on the way in. The Roth also lets you withdraw contributions at any time and never requires withdrawals.

Can I withdraw from a Roth IRA before retirement? Contributions, yes, at any time without tax or penalty, and they come out first. Earnings withdrawn before the account is five years old and you have reached the age the IRS sets are taxed as income plus a penalty, unless an exception applies.

Who can contribute to a Roth IRA? Anyone with earned income below a level the IRS sets; the allowed contribution phases down to zero across a range above it. Past that range only a conversion from a traditional IRA is allowed, with tax due on any pre-tax money converted.

Is a Roth IRA the same as a Roth 401(k)? They share the tax treatment, but a Roth 401(k) is an employer's plan, funded through payroll with the plan's higher limit and investment menu, no income limit on who can contribute, and possibly a match. A Roth IRA is your own account with the IRA limit.

Go deeper

• The Retirement calculator projects what your retirement savings could grow to by the age you plan to stop working, what that is worth in today's dollars, and the monthly income it could support.
• The Compound interest calculator shows how a starting balance and a monthly contribution grow at a given return over the years, and how much of the final amount is growth, the part a Roth IRA never taxes.
• How to track net worth across brokerages, crypto and a mortgage puts a Roth IRA at one firm and a 401(k) at another on the same list, valued at today's balance.

Where it shows up in Zypper

Zypper counts a Roth IRA at its balance. Investment and brokerage accounts, including 401(k), IRA and Roth IRA, HSA, and 529 plans, connect wherever the provider supports a connection and contribute their balances to net worth, updated automatically every day, and an account that cannot be connected is a manual account with the balance you set. Net worth is computed from every account and charted over time, so the growth that will never be taxed shows as a line. See Supported account types and Net worth tracking for the details, or get started with Zypper to see the account in your net worth.