What is a Roth IRA and how do I use it to save for retirement?

Long gone is the notion that there’s one right way to save for retirement. In fact, today’s conventional wisdom says that saving in as many ways as possible may give you more flexibility in your post-work years.

One newer savings option that’s gaining traction, especially for younger generations, is a Roth IRA. Nearly 20% of people ages 20-29 have a Roth IRA, nearly three times the number from 2019.

But Roth IRAs aren’t just for millennials and Gen Z; every person, no matter their age, can benefit from saving in a Roth IRA. Here’s how to know if a Roth IRA is right for you.

A Roth IRA is simply an individual retirement account that’s created with after-tax dollars. What are after-tax dollars? That’s income that you’ve already paid taxes on; that’s why you’re not required to pay income taxes when you use the money.

Here’s an example: Say your paycheck is $5,000, and your expenses are $4,000. One month, you decide to take the unspent $1,000 and put it in a Roth IRA. When you need to use the funds in retirement, both the contributions and the growth are not subject to income tax if certain conditions are met.

Are you married but filing separate tax returns? In general, you’ll be able to save very little in a Roth IRA. The IRS has more details.

The IRS sets yearly contribution limits for the combination of your IRA and Roth IRA. For 2025 they are:

• $7,000 for single, head of household and married, filing jointly, < age 50
• $8,000 for single, head of household and married, filing jointly, > age 50

Here’s how that works: Say you are age 45, meet the IRS income limitations, and contribute $4,000 to an IRA. You may only contribute $3,000 to your Roth IRA in that calendar year.

But remember: The more you make, the less you may contribute—the phase out. For example, if you are married, filing jointly, and make $240,000 in modified adjusted gross income, you will be limited to less than a $7,000 contribution. (Use this calculator to discover your own Roth IRA contribution limits.)

In general, to escape all penalties and taxes, you want to ensure your Roth IRA is at least five years old and that you are 59½ before withdrawing any growth from the account. (Contributions are another matter; more on that below.)

There are a couple of interesting ways you can use a Roth IRA.

• In retirement: A Roth IRA is uniquely positioned as a retirement tool. Both the original contributions you made and any growth you take from those savings are tax free. And you can take what you want or need, when you want or need it. Withdrawals won’t affect your income tax level either.
• At any age: You may withdraw the contributions at any time.
• Under certain conditions: You may also be able to withdraw earnings (as well as contributions) if you become disabled or are purchasing or building your first home, or a first home for a qualified family member. (There is a lifetime $10,000 limit.)

If you withdraw any earnings before age 59½ and the account is less than five years old, and the withdrawal is not due to one of the other conditions above, you may have to pay taxes (on the growth) and a penalty. However, there are exceptions to those withdrawal rules including medical, higher education, and birth or adoption expenses.

Unlike a 401(k) or an IRA, a Roth IRA does not have a required minimum distribution, or RMD. In fact, you need not ever withdraw funds from a Roth IRA during your lifetime.

Diversity in how you save for retirement increases your potential options to pay for retirement, and that’s true of a Roth IRA. Beyond the tax-free withdrawals in retirement, opening up and contributing to a Roth IRA may be beneficial in other ways.

• If your workplace doesn’t offer a retirement savings program, you can use a Roth IRA to build retirement savings—and continue to add to it even if you have access to a 401(k) at another job.
• If you envision being in a higher tax bracket in retirement, you’ve already paid the income tax and won’t be responsible for it at a potentially higher tax rate.
• If you want to convert some of your savings to a Roth IRA, it may help you balance taxes and RMDs in retirement. Consult your tax and financial professionals for help.

One of the requirements of opening and contributing to a Roth IRA is that you must be employed—but there is one exception. If you are married and your spouse is not employed, or doesn’t make enough to set up a Roth IRA, you may set up one for them. The same rules and limitations apply, and you must be married and file a joint tax return.

There’s another option for boosting Roth IRA savings. If you have leftover funds in a 529 plan, you can transfer them, tax-free, to a Roth IRA, up to $35,000 total. (Yearly contribution limits still apply.) The 529 account must be open 15 years and the contributions that you intend on rolling over must be older than five years. In addition, the Roth IRA beneficiary—the student—must have earned enough income that’s at least equal to the amount that’s going to be rolled over.

Absolutely; because you have already paid income taxes on the funds you use to establish a Roth IRA, your beneficiary will not be responsible for the taxes. They will, however, have to withdraw the funds within 10 years.

Most Roth IRAs have a range of options for you to choose from. Some may require a minimum balance, and have varying fees. Investment options differ, too, from those that are more hands-on choices for you to pick and choose from than others. In addition, some employers now offer Roth 401(k)s as part of a retirement package. (Check with your HR department for details.)

If you make contributions to a Roth IRA by your tax filing deadline, you’ll receive form 5498 from the IRS. This simply lists your contributions, but you don’t have to report them as they’re after tax.