There are many ways to save for retirement, making it hard to know where to begin. If you’re considering an IRA, you might assume a traditional account is the standard choice.
But Roth IRAs offer another option—one that allows your investments to grow tax-free and gives you more flexibility in retirement.
This cheat sheet covers the essentials of Roth IRAs, including how they work, who can contribute, and why they might be a strong fit for your long-term goals.
What is a Roth IRA?
A Roth IRA is a retirement savings account that offers tax-free investment growth. Contributions are made with after-tax dollars, meaning you pay taxes up front to enjoy tax-free withdrawals in retirement.
This contrasts with a Traditional IRA, in which contributions are made with pre-tax dollars and withdrawals are taxed in retirement.
Because of the tax-free withdrawal benefits, a Roth IRA is often an excellent investment option if you expect higher tax obligations in retirement.
Roth IRA Benefits
Aside from tax-free withdrawals, there are many additional benefits to opening a Roth IRA.
- Withdraw contributions at any time without taxes or penalties. This does not apply to earnings.
- Maintain a Roth IRA alongside other types of retirement accounts, such as a 401(k). This can help you maximize your savings, especially if you can contribute more than the annual IRA limit.
- No required minimum distributions (RMD). Once you reach age 73, Traditional IRAs require you to take an annual distribution based on the value of your account and an IRS-issued life expectancy table. RMDs are not required in Roth accounts, meaning you can leverage the full growth potential of your account until you’re ready to make withdrawals.
Roth IRA Income and Contribution Limits
Both Roth IRAs and Traditional IRAs are subject to annual contribution limits. The base contribution limit in 2025 is $7,000 annually, with an additional $1,000 in catch-up contribution if you’re 50 or older.
Roth IRAs also have additional contribution limits based on your tax-filing status and income during the filing year.
| Tax-filing status | Income | Contribution limit |
| Married filing jointly, Qualifying widower | Less than $236,000 | Full amount |
| $236,000 or more but less than $246,000. | Reduced amount | |
| $246,000 or more | Zero | |
| Married filing separately, (lived with your spouse at any point during the tax year) | Less than $10,000 | Reduced amount |
| $10,000 or more | Zero | |
| Single, Head of household, Married filing separately (did not live with spouse during the tax year) | Less than $150,000 | Full amount |
| $150,000 or more but less than $165,000 | Reduced amount | |
| $165,000 or more | Zero |
What’s the Difference Between Roth IRAs and Traditional IRAs
The major difference between Traditional IRAs and Roth IRAs is when taxes are applied.
Traditional IRAs have an upfront tax break, and your contributions grow tax-deferred over time. Once you reach retirement age, you pay taxes on all withdrawals based on your income bracket.
Additionally, as indicated above, Traditional IRAs don’t have an additional layer of contribution limits, and owners must take RMDs. Since RMDs reduce your overall account balance, they can affect future earnings by reducing your compound interest potential.
Roth IRAs, on the other hand, grow tax-free over time. You do not need to pay taxes on qualified withdrawals, nor do you need to take RMDs.
As you plan for retirement, it’s essential to weigh the options available and make the choice that will benefit you most in the future. A qualified financial professional can help you choose the best type of account for your needs and goals.
How Does a Self-Directed IRA Work?
Like other retirement accounts, a Roth Self-directed IRA (SDIRA) allows your investments to grow over time. However, when your SDIRA is structured as a Roth account, you can leverage tax-free growth and qualified withdrawals.
That makes Roth SDIRAs a powerful tool for building long-term wealth, especially if you expect to be in a higher tax bracket later.
Compared to standard Roth IRAs, SDIRAs offer far more flexibility when selecting assets. While a typical Roth IRA limits you to stocks, bonds, mutual funds, and ETFs, a Roth SDIRA opens an array of alternative investment options, including,
- Real estate
- Cryptocurrency
- Private equity
- Precious metals
- Promissory notes
- Commodities
If you want to invest in alternative assets, you first need to open an SDIRA account and fund it. There are several ways to fund your Roth SDIRA, including:
- Annual contributions (up to the IRS limits)
- Transfers from another Roth IRA
- Rollover contributions from eligible Roth accounts, such as a Roth 401(k)
Tips for Investing Your Roth IRA
Maximize the growth of your Roth IRA by following these investor tips.
- Start early to maximize compound growth. The earlier you invest, the more time your money has to grow through compound interest. Even small contributions in your 20s can become significant gains later in life.
- Contribute the maximum allowed each year. Maxing out your annual contributions helps you take full advantage of the Roth SDIRA’s tax-free growth and build a strong foundation for your retirement.
- Prioritizing diversification in your portfolio. Spreading your investments across different asset classes reduces risk and helps protect your portfolio from market volatility.
- Choose low-cost index funds or ETFs. These assets offer broad market exposure with relatively low fees and can provide a strong base for long-term growth.
- Consider a target-date fund for simplicity. Target-date funds automatically adjust your investment mix as you approach retirement. They’re a hands-off option that can help you meet your goals while adjusting your strategy with minimal effort.
- Rebalance your portfolio regularly. As markets shift, your portfolio can drift from your original goals. Rebalancing once or twice a year keeps your risk level in check and your asset mix aligned. However, be cautious to ensure that rebalancing isn’t a knee-jerk reaction to expected market shifts.
- Avoid early withdrawals to preserve tax benefits and compound growth. Taking money out early can trigger penalties and reduce your ability to leverage the benefits of compound growth.
FAQs
What are the income limits for Roth IRA contributions?
Roth IRA contributions in 2025 are limited to $7,000 annually. If you’re 50 or older, you can make an additional $1,000 catch-up contribution, raising your annual limit to $8,000.
However, your tax-filing status and income also affect your Roth IRA contribution limit.
For instance, married couples filing jointly can contribute the full annual amount if they make less than $236,000, but their contribution will be reduced if they make over that. They can’t contribute at all if their annual income exceeds $246,000.
Always check the most recent IRS-issued Roth IRA contribution limits to ensure your account complies.
What types of investments can I hold in a Roth IRA?
If you have a standard Roth IRA, your account can hold common assets, such as stocks, bonds, mutual funds, and ETFs.
However, if you open a self-directed Roth IRA, your asset selection will increase. Roth SDIRAs can hold various alternative investments, including real estate, cryptocurrency, and private equity.
Is there a penalty for withdrawing money early from a Roth IRA?
There may be a penalty for making an early Roth IRA withdrawal if your account is less than five years old or if you withdraw from earnings before retirement. However, you can withdraw from contributions tax and penalty-free at any time.
