Roth IRA

An individual retirement account funded with after-tax dollars — contributions are not tax-deductible, but qualified withdrawals in retirement, including all investment growth, are completely tax-free.

A Roth IRA (Individual Retirement Account) is a tax-advantaged retirement savings account that inverts the tax treatment of a traditional IRA. Contributions are made with money you've already paid income tax on — there's no upfront tax deduction. In exchange, the money grows tax-free inside the account, and qualified withdrawals in retirement (after age 59½ and after the account has been open at least five years) are completely tax-free, including all investment gains accumulated over decades. The Roth IRA's core promise is: pay taxes now at your current rate, and never pay taxes on that money again — including on any growth, regardless of how large the account becomes.

Contribution limits for Roth IRAs are set by the IRS and adjusted periodically for inflation. In 2024, the limit is $7,000 per year ($8,000 if you're 50 or older, via the catch-up contribution). These limits are the same as traditional IRA limits, and the $7,000 cap is shared across all your IRAs combined — you can contribute to both a Roth and a traditional IRA in the same year, but the total across all IRAs cannot exceed $7,000. Unlike 401(k)s, there are no required minimum distributions (RMDs) from a Roth IRA during the owner's lifetime — assets can continue growing tax-free indefinitely, making Roth IRAs particularly effective for estate planning and for people who don't expect to need the funds in early retirement.

Roth IRA eligibility is subject to income limits — a meaningful constraint for higher-income earners. In 2024, single filers with modified adjusted gross income (MAGI) above $161,000 cannot contribute directly to a Roth IRA; the ability to contribute phases out between $146,000 and $161,000. For married filing jointly, the phase-out range is $230,000–$240,000. Many tech employees earning $200,000+ exceed these limits and cannot contribute directly. However, the backdoor Roth IRA — contributing to a traditional IRA (which has no income limit for contributions) and then converting it to a Roth — is a widely used workaround that allows high earners to fund Roth accounts indirectly, subject to the pro-rata rule if they hold other pre-tax IRA assets.

The decision between a Roth IRA and a traditional IRA (or between Roth and pre-tax 401(k) contributions) hinges primarily on the comparison between your current marginal tax rate and your expected rate in retirement. If you expect to be in a higher tax bracket in retirement — either because your income grows, because tax rates increase generally, or because RMDs from pre-tax accounts push you into higher brackets — the Roth's tax-free growth is more valuable. If you're currently in your peak earning years and expect lower income in retirement, the traditional IRA's upfront deduction may produce a better outcome. Early-career employees in lower brackets almost always benefit more from Roth accounts; peak-earners often benefit more from pre-tax contributions.

Roth IRA Key Rules

  • Contribution limit: $7,000/year in 2024 ($8,000 if age 50+), shared across all IRAs.
  • Income limits: phases out for single filers at $146,000–$161,000 MAGI; married filing jointly $230,000–$240,000 (2024).
  • Contribution withdrawal: you can withdraw your original contributions (not earnings) at any time, penalty-free — Roth contributions are not locked up like 401(k) funds.
  • Qualified withdrawal: tax-free and penalty-free if age 59½ or older AND account has been open at least 5 years.
  • No RMDs: no required minimum distributions during the account owner's lifetime — assets can stay invested indefinitely.
  • Spousal IRA: a non-working spouse can contribute to a Roth IRA if the household has sufficient earned income.
  • Conversion: you can convert traditional IRA funds to Roth at any time regardless of income — you pay ordinary income tax on the converted amount in the year of conversion.

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

  • Roth IRA vs. Traditional IRA: Roth uses after-tax dollars with tax-free withdrawals; traditional uses pre-tax dollars with tax-deferred withdrawals taxed as ordinary income. Same contribution limits ($7,000). Roth has income limits; traditional deductibility phases out at lower income for those with workplace retirement plans.
  • Roth IRA vs. Roth 401(k): Roth 401(k) has much higher contribution limits ($23,000 in 2024 vs. $7,000 for IRA) and no income limits — anyone can contribute. Roth 401(k) has RMDs (though these can be avoided by rolling to a Roth IRA). Roth 401(k) may have limited investment options; Roth IRA offers full investment flexibility.
  • Which to prioritize: many advisors suggest the sequence — (1) contribute enough to 401(k) to get full employer match, (2) max out HSA if eligible, (3) max out Roth IRA, (4) return to max out 401(k).

The Backdoor Roth IRA

High-income earners above the Roth IRA income limits can still fund a Roth account through the backdoor Roth IRA strategy: contribute to a traditional IRA (no income limit for contributions, though the deduction phases out at high income), then immediately convert the traditional IRA to a Roth. Because you contributed after-tax dollars and converted before any growth, the conversion produces no taxable income. The strategy works cleanly if you have no other traditional IRA assets — if you do, the pro-rata rule applies, which taxes a portion of the conversion based on the ratio of pre-tax to after-tax IRA funds across all your traditional IRAs. Many high earners roll their existing traditional IRA funds into their employer's 401(k) to clear the way for clean backdoor Roth contributions.

Example

A 28-year-old engineer earns $120,000 and is in the 22% federal tax bracket. She contributes $7,000 to a Roth IRA, investing it in a diversified index fund. Over 35 years, assuming 7% average annual returns, the $7,000 grows to approximately $75,000. She withdraws the entire $75,000 tax-free in retirement. Had she instead used a traditional IRA, she would have saved $1,540 in taxes today (22% × $7,000) but owed taxes on the full $75,000 withdrawal in retirement — if she's in the 22% bracket then, that's $16,500 in taxes. The Roth was the better choice because her tax rate stayed the same.