Roth IRA Explained

By Ryan O'Connell, CFA, FRM Published October 14, 2026

A Roth IRA can help you save for retirement with tax-free qualified withdrawals, but eligibility and withdrawal rules determine how useful it is. Regular contributions, converted retirement savings and investment earnings receive different treatment. This guide explains those distinctions, the 2026 limits and how to evaluate an account. It covers ordinary individually owned Roth IRAs; employer-sponsored Roth SEP and SIMPLE arrangements have additional rules. For the larger role of IRAs alongside workplace plans, see retirement planning and accounts.

What Is a Roth IRA?

A Roth IRA is an individual retirement arrangement funded with nondeductible regular contributions or eligible retirement transfers. You receive no federal income-tax deduction for a regular contribution. Investment earnings generally accumulate without annual federal income tax, and qualified distributions, including earnings, are tax-free. [2] [3]

Each IRA has one owner, with a financial institution acting as trustee or custodian. Spouses use separate accounts even when filing jointly. The owner chooses investments within the provider’s available products and permissions, requests distributions and names beneficiaries. Our personal investing fundamentals guide explains the portfolio choices that sit inside this account structure.

Who Can Contribute to a Roth IRA?

Regular contribution eligibility generally requires qualifying compensation and Roth-specific modified adjusted gross income, or MAGI, within the permitted range. Wages, tips and qualifying net self-employment earnings count; gross business revenue is not the self-employment compensation figure. Interest, dividends, ordinary rental income and pension payments generally do not qualify. Special rules cover categories such as nontaxable combat pay and certain taxable graduate stipends. [2]

There is no federal upper age limit for regular Roth contributions. Participation in a workplace retirement plan does not by itself prevent them, although compensation and income limits still apply. These are regular-contribution tests; eligible conversions and retirement rollovers follow different funding rules. [10] [12]

Spousal Contributions

A married couple filing jointly may fund separately owned IRAs using their combined qualifying compensation, even if one spouse earns little or nothing. Each spouse remains subject to their individual annual limit, and combined contributions cannot exceed the couple’s qualifying compensation. The Roth MAGI limits also apply. A spousal IRA describes this contribution arrangement; it is not a jointly owned IRA. Each spouse’s age determines that spouse’s catch-up eligibility. [2] [12]

2026 Contribution and Income Limits

For tax year 2026, the combined regular contribution limit across your Traditional and Roth IRAs is $7,500, or $8,600 if you are 50 or older by year-end. The latter includes a $1,100 catch-up. Your qualifying compensation can impose a lower ceiling. Having accounts at several institutions does not multiply the limit; ordinary IRA contributions already made elsewhere use the same annual allowance. [1] [12]

Direct Roth contributions also depend on MAGI. The following ranges use IRS Notice 2025-67 and the filing-status distinctions in Publication 590-A. The special married-separate rule is supported by Treasury’s Roth contribution regulation. [1] [2] [5]

*Subject to compensation and the shared IRA limit. MAGI is a tax calculation, not necessarily salary or the AGI printed on your return. Use the IRS Roth worksheet or current tax software; specified deductions and exclusions require adjustments. At the lower phase-out endpoint, the calculation itself produces no income-based reduction. For the married-separate/lived-with-spouse row, MAGI of $0 or less does not remove the separate compensation requirement.

Funding and Contribution Deadlines

Regular contributions must be made in cash; you cannot deposit shares from a taxable brokerage account as a regular contribution. Eligible retirement transfers can follow different rules. Identify the transaction as a regular contribution, transfer, rollover or conversion, and select the correct contribution tax year. [2] [5]

Generally, contributions for a tax year can be made through that year’s federal return filing deadline, excluding extensions. An extension to file does not ordinarily extend the contribution window. Keep contribution confirmations and monitor deposits across providers. Conversions and eligible rollovers do not use the regular annual contribution limit. The receiving account must support the transaction, and a workplace plan must allow an eligible distribution; an RMD or hardship distribution, for example, is not rollover-eligible. A direct movement of pretax savings to a Roth can still create conversion income. [9] [10] [12]

How Roth IRA Withdrawals Are Taxed

For an ordinary owner distribution that is not qualified, IRS Publication 590-B applies an ordering rule across your Roth IRAs: [3]

1. Regular contribution basis first. Your remaining regular contribution basis comes out without federal income tax or the 10% early-distribution additional tax. Certain workplace Roth rollover basis is included in this tier, as explained below.
2. Conversions and certain non-Roth retirement-plan rollovers next. Amounts generally come out oldest year first; within each year’s amount, the taxable converted portion precedes the nontaxable portion. Separate additional-tax rules can apply.
3. Earnings last. Nonqualified earnings are taxable as ordinary income and may also face the 10% additional tax.

A rollover from a designated Roth workplace account, such as a Roth 401(k), has separate basis treatment. The amount treated as investment in the contract adds to the first contribution-basis tier; it is not placed after conversions. Form 8606 instructions, lines 22 and 24, distinguish that amount from second-tier conversion basis. Do not assume every dollar of a nonqualified workplace Roth rollover is basis. Retain the plan’s rollover statement and any in-plan Roth conversion history: a special in-plan recapture tax can follow a subsequent IRA withdrawal during its original five-year period. [4] [8]

The security you sell or the particular Roth account you withdraw from does not let you choose the tax category. Keep records of contributions, prior distributions and conversions across custodians. Corrective distributions and inherited accounts require their own analysis.

Roth IRA Five-Year Rules

Qualified Distributions and Earnings

A distribution is qualified when it satisfies both the five-tax-year requirement and an eligible event: reaching age 59½, meeting the IRS disability definition, payment to a beneficiary or estate after death, or qualifying first-home expenses within the $10,000 lifetime limit. The first-home rules include eligible acquisition costs and timing requirements; using funds for a home does not by itself satisfy them. [3] [6]

The qualification period starts January 1 of the first tax year for which you fund a Roth IRA, including a first qualifying conversion. Merely opening an empty account does not start it. A first contribution for 2026 starts the clock January 1, 2026; the period is complete January 1, 2031. You must also satisfy the age or other event requirement. Opening another Roth IRA does not restart your existing period. [6]

Converted Amounts and Early-Distribution Tax

A separate five-tax-year period applies to each conversion and certain retirement-plan rollovers, starting January 1 of that transaction’s tax year. Before age 59½, withdrawing the portion taxed at conversion within its period can trigger the 10% additional tax unless an exception applies. The already-taxed converted principal is not taxed again as income. Ordering still applies, so regular contribution basis is used before a distribution reaches converted amounts. [3] [6]

Conversions and the Backdoor Roth Strategy

A Roth conversion moves eligible Traditional IRA savings into a Roth IRA. Untaxed amounts generally become ordinary income in the conversion year. Direct contributions’ Roth income phase-outs do not bar conversions, and conversion amounts do not consume the annual regular contribution allowance. You may therefore be ineligible for a direct Roth contribution while still able to complete an eligible conversion or rollover. [10] [12]

A backdoor Roth is a strategy: make an eligible nondeductible Traditional IRA contribution, then convert. The initial contribution still requires compensation and annual-limit space. The resulting account is an ordinary Roth IRA. [2] [10]

The conversion is not automatically tax-free. The pro-rata calculation generally considers basis and balances across your own Traditional IRAs, including traditional SEP and SIMPLE IRAs, using December 31 values and relevant distributions/conversions. Inherited IRA calculations are separate; workplace 401(k) balances are not part of this IRA pool. Creating a separate IRA for nondeductible cash does not isolate that cash from existing pretax IRA money. Form 8606 tracks basis and conversion taxation. Conversions cannot now be reversed through recharacterization. A traditional SIMPLE IRA also has special initial two-year movement restrictions; do not assume an ordinary backdoor sequence is immediately available for its assets. [2] [4] [10] Read Traditional IRA rules and personal tax strategy before assessing the tax cost.

Transfers and Inheritance

A properly arranged Roth-to-Roth trustee transfer can move the account to a new provider while preserving tax status and the original qualification period. It does not create extra annual contribution room. An indirect IRA-to-IRA rollover paid to you generally has a 60-day deadline and a one-per-12-month restriction aggregated across your IRAs; trustee transfers are outside that restriction. The one-per-year rule also excludes conversions and plan-to-IRA rollovers. [2] [9] Pretax retirement savings moved into a Roth can instead create taxable conversion income. See rollover IRA transfer mechanics for the distinctions.

A designated Roth workplace rollover does not import its years into the Roth IRA earnings-qualification clock. If you previously funded any Roth IRA, that earlier IRA history supplies the clock; otherwise the IRA period begins with its first funding tax year. Preserve those records when changing institutions. [8]

No required minimum distributions apply during the original Roth IRA owner’s lifetime. Beneficiaries nevertheless face payout rules. Many nonspouse individual designated beneficiaries must empty an inherited Roth by December 31 of the tenth year after death. Under that ordinary ten-year method, no annual withdrawal floor applies during years one through nine because the Roth owner is treated as dying before the required beginning date. Spouses, other eligible designated beneficiaries, estates, trusts and successor beneficiaries can have different methods and annual duties. [3] [7] For beneficiary distributions, death supplies an additional-tax exception, but earnings can remain taxable until the owner’s qualification period is met. The earnings clock and inherited payout deadline are separate tests. [3] [6] Use our inherited Roth IRA guide for beneficiary-specific treatment and review designations as part of estate planning.

Roth IRA vs. Other Investment Accounts

A lower tax rate now than on future withdrawals can favor Roth funding; an available deduction at a higher current rate can favor Traditional funding. Compare equal pretax resources, including what happens to any tax savings, and consider uncertain future rates and liquidity needs.

A Roth 401(k) is a workplace-plan account with separate contribution limits, plan eligibility and withdrawal rules; Roth IRA MAGI limits do not apply to its elective deferrals. A taxable individual brokerage account generally has no IRA contribution cap, but dividends and realized gains can create current taxes. The Roth label alone does not determine which account should receive every dollar.

How to Evaluate and Open an Account

1. Check tax eligibility. Estimate compensation, filing status, Roth MAGI and contributions at other institutions.
2. Compare providers. Review investments, service, actual account/product charges, transfer support and beneficiary administration. Ask whether the institution can accept your intended funding transaction and document its tax character.
3. Select the correct registration and funding method. Complete the institution’s identity and tax information, review the account agreement and beneficiary designations, then identify each deposit accurately. For a minor owner or an authorized representative, confirm the institution’s registration and authority-document requirements.
4. Choose investments and preserve records. Retain tax-year confirmations, Form 8606 basis history, conversion/plan-rollover records and evidence of your first funded Roth year. Ask how records and authorized account management are handled if you become unable to manage the account.

Common Mistakes

• Using an old limit or counting each IRA separately. Reconcile the correct tax year’s combined deposits.
• Treating salary as MAGI. Investment income and tax adjustments may change eligibility.
• Calling all withdrawals tax-free. Identify contribution basis, conversion history and earnings first.
• Confusing the two five-year periods. Keep the original qualification date and each conversion year.
• Ignoring an excess deposit. Excess contributions can attract a recurring 6% excise tax while unresolved, subject to the applicable account-value cap. Ask the custodian about a formal correction, including attributable earnings; an ordinary withdrawal is not automatically the right correction. The timely excess-return deadline can include filing extensions even though the ordinary contribution deadline does not. [2] [12]
• Assuming an IRA tax exception means no income tax. An exception may remove only the 10% additional tax.

Costs and Limitations

Tax benefits do not remove market losses, commissions, spreads, fund expense ratios, advisory costs or possible account-service charges. Compare total costs for your intended investments. Review the institution’s fee schedule and the costs of the funds or services you select, including transfer or account-closing charges. [11]

The institution’s products, trading approvals and service policies can limit what you do in the account. Federal IRA rules also restrict prohibited personal transactions: borrowing money from your own IRA, pledging it as loan security or buying property for personal use can have serious tax consequences. Complex or directly controlled investments merit specific tax review. [2]

Withdrawing contribution basis also removes money from future retirement growth; it does not automatically restore contribution room. Keep emergency needs and retirement goals separate in your planning. State taxation and unusual transactions require separate advice. Our tax-aware portfolio management guide discusses coordinating investments across accounts.

Sources and Rule Date

U.S. federal rules assessed October 13, 2026; contribution and income figures are for tax year 2026. IRS publications and Form 8606 instructions below are 2025 editions; Notice 2025-67 supplies current annual amounts. Saved Treasury regulatory text was versioned October 1, 2026.

1. IRS: Notice 2025-67, numbered pp. 4–5, 2026 IRA limits and Roth phase-outs.
2. IRS: Publication 590-A (2025), Chapters 1–2, compensation, contributions, spousal limits, Roth MAGI, transfers and conversions.
3. IRS: Publication 590-B (2025), Chapter 2 Roth qualification/ordering/early-distribution rules and Chapter 1 beneficiary/exception rules.
4. IRS: Form 8606 instructions (2025), Definitions, Parts I–II basis/conversions and Part III lines 22/24 workplace Roth basis.
5. Treasury: 26 CFR 1.408A-3, A-2(b), A-3(b)/(c), contribution timing and married-separate structure; annual indexed values come from source 1.
6. Treasury: 26 CFR 1.408A-6, A-1/A-2/A-5/A-8, qualification, waiting periods and ordering.
7. Treasury: 26 CFR 1.408-8, (b)(1)(ii), original-owner Roth RMDs and post-death treatment.
8. IRS: FAQs on designated Roth accounts, rollovers, Roth IRA clock, in-plan recapture and recordkeeping.
9. IRS: Rollovers of retirement plan and IRA distributions, eligible amounts, 60-day deadlines and one-per-year exceptions.
10. IRS: Topic no. 309 — Roth IRA contributions, contribution versus conversion eligibility and recharacterization.
11. SEC Investor.gov: How Fees and Expenses Affect Your Investment Portfolio, transaction, ongoing and account charges.
12. IRS: IRA contribution limits, 2026 aggregate amounts, spousal contributions and excess contributions.