Roth IRA

A Roth IRA is an individual retirement account funded with after-tax dollars. Contributions and their earnings can grow tax-free, and qualified withdrawals are tax-free in retirement. Unlike traditional IRAs, Roth contributions are not tax-deductible but qualified distributions are tax-free. Roth IRAs also have no required minimum distributions (RMDs) during the original owner’s lifetime.

Key takeaways

• Funded with after-tax dollars; qualified withdrawals (see rules below) are tax-free.
• Contributions (principal) can be withdrawn anytime tax- and penalty-free.
• Best for people who expect to be in a higher tax bracket in retirement.
• 2025 contribution limits: $7,000 per year ($8,000 if age 50 or older).
• 2025 MAGI phaseout for contributions: single filers begin to phase out at $165,000; married filing jointly at $246,000.
• No lifetime RMDs for the original Roth owner — useful for long-term wealth transfer.

How a Roth IRA works

• You contribute cash (checks or money orders count) from earned income. Contributions must come from taxable compensation and cannot be contributed as securities or property.
• Investments inside the account grow tax-free.
• Withdrawals of contributions are allowed at any time without taxes or penalties.
• Withdrawals of earnings are tax-free only if they are “qualified distributions” (generally after age 59½ and after the account has been open at least five years).

Sources of Roth funding include regular contributions, spousal contributions, rollovers, transfers, and conversions.

Contribution rules and eligibility

• Contribution limit for 2025: $7,000 ($8,000 if age 50+).
• You cannot contribute more than your earned income for the year.
• Eligibility is limited by modified adjusted gross income (MAGI). For 2025, the ability to contribute phases out at:
• Single filers: phaseout around $165,000 (full exclusion above the upper threshold).
• Married filing jointly: phaseout around $246,000.
• Individuals within the phaseout range can contribute a reduced amount based on their MAGI.
• Saver’s Credit may apply to eligible low- and moderate-income contributors.

Spousal Roth IRA

A working spouse can contribute to a Roth IRA on behalf of a nonworking (or low-earning) spouse if the couple files a joint tax return. The total family contributions cannot exceed the couple’s combined taxable compensation and must respect individual contribution limits.

Allowable and prohibited investments

Allowed:
* Stocks, bonds, mutual funds, ETFs, CDs, money market funds.
* Through a self‑directed IRA (SDIRA): real estate, private equity, certain precious metals, and—if the custodian supports it—cryptocurrency.

Prohibited:
* Life insurance contracts, collectibles, most physical coins, and S-corp stock.
* You cannot contribute cryptocurrency directly as a rollover or regular contribution; purchases must be made within the IRA using cash.

Note: Custodians differ widely. Many mainstream brokers restrict alternative assets; a qualified self‑directed custodian is required for unusual investments and handles custody/compliance.

Opening a Roth IRA

• Must be opened with an IRS‑approved custodian or trustee (banks, brokerages, credit unions, or specialized self‑directed custodians).
• You may open a Roth IRA anytime, but contributions for a tax year must be made by your tax‑filing deadline (usually in April of the following year).
• Expect basic documents at opening, such as an IRA disclosure statement and an adoption/agreement document.
• Compare providers on investment options, fees, trading costs, minimums, and any inactivity or account fees.

FDIC insurance and safety

• IRAs held at banks are eligible for FDIC insurance up to applicable limits (typically $250,000), but coverage categories and aggregation rules differ from regular deposit accounts. Balances across IRAs at the same institution may be combined for insurance limits.

Withdrawals and distribution rules

Qualified distributions (tax-free):
* Must meet both:
* The five‑year rule: at least five tax years since the first Roth contribution or conversion, and
* One of the triggering events: owner age 59½ or older, disability, death, or a first‑time home purchase (up to a $10,000 lifetime limit for a qualified first home purchase).

Five‑year rule — basics:
* If both the age and five‑year tests are met: earnings withdrawn are tax- and penalty-free.
* If the five‑year rule is met but you are under 59½: earnings may be taxable and possibly subject to penalties unless an exception applies.
* If the five‑year rule is not met: earnings may be taxable and penalties may apply, though exceptions exist for certain situations.

Order of withdrawals:
* Distributions follow a FIFO order: contributions come out first (tax- and penalty-free), then conversions (subject to their own five‑year rules if applicable), then earnings.

Non‑qualified distributions — common exceptions (may avoid the 10% penalty, taxes may still apply depending on the rule):
* First‑time home purchase (up to $10,000 lifetime).
* Qualified education expenses.
* Unreimbursed medical expenses exceeding 7.5% of AGI.
* Medical insurance premiums if unemployed.
* Disability.
* Birth or adoption expenses (up to $5,000 if within one year).
* Death (beneficiary distributions follow inheritance rules).

Roth IRA vs. Traditional IRA

• Tax timing:
• Roth: contributions after tax; qualified withdrawals tax-free.
• Traditional: contributions often pre‑tax or deductible; withdrawals taxed as income.
• RMDs:
• Roth: no lifetime RMDs for original owner.
• Traditional: lifetime RMDs required starting at the statutory age.
• Best choice depends on current vs. expected retirement tax rates, ability to pay taxes now, and estate-planning goals.

Roth IRA vs. 401(k)

• Roth IRA advantages:
• Tax-free withdrawals in retirement (for qualified distributions).
• Generally more investment choices and account control.
• No RMDs for the original owner.
• 401(k) advantages:
• Higher contribution limits (2025 elective deferral limit is $23,500; plus $7,500 catch-up if age 50+).
• Employer match opportunities.
• Potential access to loans or plan-specific features.
• Many savers use both: max employer match in a 401(k) first, then contribute to a Roth IRA if eligible.

How much to contribute monthly

• 2025 annual limit $7,000 → about $583.33 per month for those under 50.
• If age 50+, $8,000 annual limit → about $666.67 per month.
• You may contribute anytime during the year or by the tax-filing deadline for the prior tax year.

Pros and cons

Advantages
* Tax‑free growth and qualified withdrawals.
* Flexibility: contributions withdrawable at any time without penalty.
* No lifetime RMDs for the original owner — useful for estate planning.
* Potentially ideal for younger or lower-income savers who expect higher tax rates later.

Disadvantages
* No upfront tax deduction.
* Lower annual contribution limits compared with 401(k)s.
* Income limits restrict or phase out eligibility for high earners.
* Some custodians limit investment choices; alternative assets require specialized custodians.

Is a Roth IRA all you need?

A Roth IRA is a powerful tool, but relying on a single account type limits tax diversification. Combining different account types (pre‑tax and after‑tax) can provide flexibility in retirement tax planning, protect against future tax-law changes, and preserve access to employer matches available in 401(k) plans.

Fiduciary and advice considerations

Regulatory standards require retirement advice to meet fiduciary best‑interest standards in certain settings. When seeking advice about Roth IRAs or conversions, confirm whether the advisor acts as a fiduciary for retirement recommendations.

Bottom line

A Roth IRA provides tax-free growth and withdrawals under qualified conditions, flexible access to contributions, and no lifetime RMDs for the original owner — making it an attractive option for many savers. Choose a custodian that fits your investment preferences, watch income and contribution limits, and consider combining Roths with other account types for broader tax diversification.