You pay taxes on the money going in, not on the money coming out

A Roth IRA is taxed backwards from a regular IRA. With a Roth, you contribute money that has already been taxed as income. In return, the money grows tax-free inside the account, and you withdraw it tax-free in retirement. You do not pay federal income tax on the earnings when you take them out, and you do not pay tax on the original contributions either.

The trade-off is straightforward: you give up a tax deduction now to avoid taxes later. If you are in a lower tax bracket today than you expect to be in retirement, a Roth usually makes sense. If you are in a high bracket now and expect to be in a lower one later, a traditional IRA (where contributions are tax-deductible) may save you more money overall.

Key Takeaways

  • Roth IRA contributions come from after-tax income, so you get no tax deduction in the year you contribute.
  • Money inside a Roth grows tax-free, and you owe no federal income tax when you withdraw earnings in retirement, as long as the account has been open at least five years and you are at least 59½.
  • You can withdraw your original contributions at any time without tax or penalty, even before retirement.
  • If you earn above a certain threshold, you cannot contribute directly to a Roth, though a backdoor Roth conversion may be an option.
  • State income tax on Roth withdrawals depends on your state; most states do not tax retirement income, but some do.

What happens when you contribute

When you put money into a Roth IRA, that money has already been taxed as ordinary income. You earned it, paid federal (and possibly state) income tax on it, and then deposited it into the account. The IRS does not give you a deduction for the contribution, so your taxable income for that year does not go down.

This is different from a traditional IRA or a 401(k), where contributions often reduce your taxable income in the year you make them. With a Roth, you get no when ready tax benefit. The benefit comes later, when you withdraw.

How earnings grow tax-free inside the account

Once money is in a Roth IRA, any gains it makes—through interest, dividends, or investment growth—are not taxed each year. If you own stocks that pay dividends, you do not report those dividends on your tax return. If you sell an investment inside the Roth at a profit, you do not owe capital gains tax on that profit. The account is a tax-sheltered space.

This tax-free growth is the main advantage of a Roth. Over decades, the difference between tax-free growth and taxed growth can be substantial. A traditional IRA also grows tax-deferred (meaning you do not pay tax each year), but you will owe tax on the entire withdrawal later. With a Roth, you owe nothing.

Withdrawals in retirement: contributions versus earnings

The IRS treats contributions and earnings differently when you withdraw. Your contributions—the money you actually put in—can be withdrawn at any time, tax-free and penalty-free. This is true even if you are under 59½ and even if the account has not been open five years. The IRS knows you already paid tax on that money.

Earnings—the investment gains—are different. If you withdraw earnings before age 59½, or if the account has been open less than five years, you owe income tax on those earnings plus a 10 percent early withdrawal penalty. The only exceptions are a handful of situations: disability, medical expenses above a threshold, first-time home purchase (up to $10,000 lifetime), or certain education costs.

If you are 59½ or older and the account has been open at least five years, you can withdraw earnings tax-free and penalty-free. This five-year rule is per account, not per person—if you open a new Roth IRA, the five-year clock starts over for that account.

Income limits and who cannot contribute directly

The IRS sets income thresholds above which you cannot contribute to a Roth IRA. These thresholds change each year and depend on your filing status (single, married filing jointly, etc.). For 2024, single filers begin to lose the ability to contribute at $146,000 and cannot contribute at all above $161,000. Married couples filing jointly can contribute up to $230,000 and cannot contribute above $240,000.

If you earn above the limit, you have two options: use a traditional IRA instead, or use a backdoor Roth conversion. A backdoor Roth involves contributing to a traditional IRA (which has no income limit) and then converting it to a Roth. This is legal but has tax consequences if you already have other traditional IRAs with pre-tax money in them. Consult a tax professional before attempting a backdoor conversion.

State income tax on Roth withdrawals

Federal tax is only part of the picture. Most states do not tax retirement income, including Roth withdrawals. However, some states do tax all income, including distributions from retirement accounts. A few states tax Roth withdrawals only if you did not live there when you made the contributions.

If you live in a state with income tax—such as New York, California, or Pennsylvania—check your state's rules on retirement account withdrawals. If you plan to move in retirement, the tax treatment of your Roth in your new state may differ from your current state. State tax rules are complex and change; a tax professional in your state can give you a clear answer.

Required minimum distributions and Roth IRAs

A traditional IRA requires you to start taking money out at age 73 (as of 2023; this age has been rising gradually). A Roth IRA does not. You can leave a Roth untouched for your entire life and never take a withdrawal. This makes a Roth useful for leaving money to heirs, since they will inherit the account tax-free (though they will owe tax on earnings they withdraw).

The only exception is if you inherit a Roth from someone else. Inherited Roth IRAs have different rules depending on whether the original owner was your spouse, and the rules changed in 2024. If you inherit a Roth, consult a tax professional about your withdrawal obligations.

Frequently Asked Questions

Can I withdraw my contributions without paying tax?

Yes. Your contributions—the money you put in—can be withdrawn at any time, tax-free and penalty-free, regardless of your age or how long the account has been open. The IRS tracks contributions separately from earnings, so you can always access your own money.

Do I have to pay taxes on Roth earnings if I withdraw them after 59½?

No, as long as the account has been open at least five years. If both conditions are met—you are 59½ or older and the account is at least five years old—earnings come out tax-free. If either condition is not met, you owe income tax on the earnings plus a 10 percent penalty, with limited exceptions.

What is the five-year rule?

The five-year rule means the Roth IRA must have been open for at least five years before you can withdraw earnings tax-free. The clock starts on January 1 of the year you open the account. The rule applies per account, so if you open a second Roth IRA, that account has its own five-year clock.

Do I pay state tax on Roth withdrawals?

It depends on your state. Most states do not tax retirement income. Some states tax all income, including Roth withdrawals. A few have special rules based on where you lived when you contributed. Check your state's tax agency website or ask a tax professional in your state.

What happens to a Roth IRA if I die?

Your heirs inherit the account. They do not owe tax on the contributions you made, but they do owe income tax on any earnings they withdraw. The rules for inherited Roth IRAs changed in 2024, so the timeline for required withdrawals depends on your relationship to the heir and when you died. A tax professional can explain your heirs' obligations.