What Is a Roth IRA? How It Works, Limits, and Who It's For (2026)

# What Is a Roth IRA? How It Works, Limits, and Who It's For (2026)

By Daniel Rozin | A Versus B | October 7, 2026

A Roth IRA is a type of individual retirement account that lets you contribute after-tax dollars so that your money grows tax-free — and withdrawals in retirement are entirely tax-free. That "after-tax going in, tax-free coming out" structure makes the Roth IRA one of the most powerful long-term savings vehicles available to working Americans, especially those who expect to be in a higher tax bracket in retirement. But it comes with income limits, contribution caps, and rules worth understanding before you open one.

How a Roth IRA Works#

You contribute money you've already paid income tax on. It grows inside the account — through stocks, bonds, ETFs, or other investments — without generating any taxable events year to year. When you withdraw the money in retirement (after age 59½ and after the account has been open at least 5 years), both the contributions and all earnings come out tax-free.

This is the opposite of a Traditional IRA or 401(k), where contributions are tax-deductible today but withdrawals in retirement are taxed as ordinary income.

The core advantage: If you contribute $7,000 per year from age 25 to 65, and the account grows at 7% annually, you'd accumulate roughly $1.5 million. With a Traditional IRA, you'd pay income taxes on every dollar you withdraw. With a Roth IRA, you keep it all.

2026 Roth IRA Contribution Limits#

The IRS adjusts contribution limits periodically for inflation. For 2026:

• Under age 50: $7,000 per year
• Age 50 or older: $8,000 per year (the $1,000 catch-up contribution)

These limits apply across all your IRAs combined. If you have both a Roth and a Traditional IRA, the total contribution to both cannot exceed $7,000 (or $8,000 if 50+).

Roth IRA Income Limits (2026)#

Not everyone can contribute directly to a Roth IRA. The IRS phases out your ability to contribute based on your modified adjusted gross income (MAGI):

(These are 2025 figures; IRS typically updates annually. Confirm at irs.gov for the current tax year.)

If you earn too much to contribute directly, look into the Backdoor Roth IRA — a legal strategy where you make a non-deductible Traditional IRA contribution and then convert it to a Roth IRA. The "pro-rata rule" complicates this if you have pre-tax IRA money, so consult a CPA before executing.

What Can You Invest in a Roth IRA?#

Roth IRAs are accounts, not investments. You open one at a brokerage (Fidelity, Vanguard, Schwab, Robinhood, etc.) and then choose your investments inside the account. Common options:

• Index funds and ETFs: Lowest cost, most diversified. Total market index funds (like VTI or FSKAX) are the default recommendation for most investors.
• Individual stocks: Higher risk/reward, appropriate for a portion of a long-term portfolio.
• Bonds / bond funds: For those closer to retirement who want stability.
• Target-date funds: One-fund solutions that automatically adjust allocation as you approach retirement. Good for set-it-and-forget-it investors.

Avoid putting low-growth assets like CDs or money market accounts in a Roth IRA. The tax-free growth benefit is most valuable for high-growth assets held for decades. Compare Robinhood vs. Fidelity to choose the right brokerage for your Roth IRA — Fidelity offers $0 minimum and a wider fund selection; Robinhood is simpler but has a narrower investment menu.

Roth IRA Withdrawal Rules#

Contributions (the money you put in) can be withdrawn at any time, at any age, without taxes or penalties. This is one of the Roth IRA's most underappreciated features — your principal is always accessible.

Earnings (the investment growth) have stricter rules:

• Age 59½+ AND account open for 5+ years: fully tax-free and penalty-free.
• Age 59½+ but account less than 5 years old: no penalty, but earnings taxed as ordinary income.
• Under 59½: 10% early withdrawal penalty plus ordinary income tax on earnings (with some exceptions: first-time home purchase up to $10,000, qualified higher education expenses, disability, or death).

Roth IRA vs. Traditional IRA vs. 401(k)#

The simplest heuristic: contribute to a Roth IRA if you expect to be in a higher tax bracket in retirement than you are now; use a Traditional IRA or pre-tax 401(k) if you expect your tax rate to be lower in retirement.

Young workers early in their careers — who currently have low taxable income but high lifetime earnings potential — benefit most from the Roth's tax-free compounding. High earners already in top brackets often benefit more from the immediate deduction of a Traditional IRA or pre-tax 401(k).

For a detailed side-by-side on the tax math, see Roth IRA vs. 401(k).

Roth IRA vs. 401(k): Should You Do Both?#

Yes — if you can afford to. The typical prioritization order:

1. 401(k) up to employer match — this is a 50–100% immediate return on your money.
2. Roth IRA up to the annual limit — tax-free growth for life.
3. 401(k) beyond the match — up to the IRS 401(k) limit ($23,500 in 2026).
4. Taxable brokerage account — once tax-advantaged space is maxed.

If you can only do one, the 401(k) match is almost always worth capturing first.

No Required Minimum Distributions#

Unlike Traditional IRAs and 401(k)s — which require you to take minimum distributions starting at age 73 under the SECURE 2.0 Act — Roth IRAs have no required minimum distributions (RMDs) during the owner's lifetime. This makes the Roth IRA an extremely powerful estate planning tool: you can let the entire account compound tax-free for your entire life, then pass it to heirs (who will have their own RMD schedule but receive the funds tax-free).

How to Open a Roth IRA#

1. Choose a brokerage: Fidelity, Vanguard, Schwab, and Betterment are top choices. Each offers $0 minimum to open.
2. Open the account: Select "Roth IRA" during account setup. You'll provide your Social Security Number, income information, and bank details.
3. Fund it: Transfer money from your bank. You can contribute for the prior tax year up until Tax Day (April 15).
4. Invest the money: Don't leave it in cash — invest in a diversified portfolio or target-date fund.

The IRS website (irs.gov/retirement-plans/roth-iras) has the official rules and limits updated each year.

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FAQ#

What is the difference between a Roth IRA and a Traditional IRA?

A Roth IRA uses after-tax contributions with tax-free growth and withdrawals. A Traditional IRA uses pre-tax contributions (deductible today) but withdrawals in retirement are taxed as ordinary income. Your expected future vs. current tax rate determines which is better for you.

Can I have both a Roth IRA and a 401(k)?

Yes. These are separate accounts with separate limits. You can max out both. Many financial planners recommend contributing to both for tax diversification.

What happens to my Roth IRA when I die?

Roth IRAs pass to designated beneficiaries. Spouses can treat it as their own Roth IRA. Non-spouse beneficiaries generally must withdraw the entire account within 10 years but pay no income tax on qualified distributions.

Can I withdraw from a Roth IRA to buy a house?

Yes, with limits. You can withdraw up to $10,000 in earnings (above contributions, which are always freely withdrawable) penalty-free for a first-time home purchase — defined as not owning a home in the past 2 years.