A Roth IRA offers tax-free growth on contributions and, if you follow certain rules, on earnings as well, making this type of account a powerful tool for long-term savings. Both Roth and traditional IRAs allow your investments to avoid taxes year by year. But the IRS requires that you contribute money to a Roth IRA that you have already paid taxes on—which the IRS calls after-tax money.

Because it is built with after-tax money, a Roth IRA is particularly beneficial for individuals who anticipate being in a higher tax bracket during retirement. That’s because withdrawals during retirement are tax-free, 𝄹if they follow IRS rules. Contributions came from income on which you have already💜 paid taxes—presumably at a lower rate. Roth IRAs are also great for young professionals, people with a long investment horizon, or anyone prioritizing tax-free income later in life. In addition to these basics, there is more to know about how Roth IRAs handle taxes.

How Are Roth IRA Contributions Taxed?

Taxes on contributions happen before you add the money to your Roth IRA. That means you contribute money that’s already been taxed, so you ꦬare not entitled to a tax benefit in the form of a deduction for the year of the contribution. But that also means that your account grows tax-free.

Once the money is in the Roth IRA, any investment gains—whether from dividends, interest, or capital gains—aren’t taxed, provided you follow 澳洲幸运5官方开奖结果体彩网:IRS withdrawal rules. The IRS also limits the amount of money you can contribute to an IRA in any given year. These limits may restrict high wage earners from directly contributing to a Roth IRA.

What Are Roth IRA Contribution Limits?

The IRS sets the annual contribution limits for Roth IRAs based on age and modified adjusted gross income (MAGI). It is subject to change from one year to the next. However, for 2025 the contribution limit is $7,000, the same amount set for 2024.

Contribution limits are higher for individuals nearing retirement. The IRS allows 澳洲幸运5官方开奖结果体彩网:catch-up contributions of up to another $1,000 for people 50 years of age or older. Individuals are eligible to contribute up to this limit only if their MAGI is below a certain threshold (see table). Eligibility phases out for higher-income earners.

How Are Roth IRA Withdrawals Taxed?

Withdrawals from a Roth IRA are subject to tax rules that vary depending on whether you are withdrawing contributions or investmen🔯t gains. Though withdrawals are intended to be tax-♑free, early withdrawals of earnings are subject to a 10% penalty as well as tax.

Contributions: Yo🌄u can withdraw your original contributions at any time, tax-free and penalty-free, since taxes were already paid upfront.

Investment gains: Withd🌺rawals of earnings are tax-free if you meet two conditions: 

• You’ve had this or any Roth IRA for at least five years.
• You’re age 59½ or older.

The Bottom Line

Roth IRAs are a standout option for individuals seeking tax-free growth and flexibility in retirement savings. While they may not offer an immediate tax break, the long-term benefits—like tax-free withdrawals and no RMDs—are particularly appealing for people prioritizing future financial freedom. Understanding the tax implications, contributio🍷n limits, and withdrawal rules ensures you can make the most of this powerful retirement vehicle.