Roth IRA: rules, costs and examples

Overview

A Roth IRA uses contributions that are not deductible. Qualified withdrawals can be free of federal income tax. The benefit is conditional: the rules distinguish regular contributions, conversions, and earnings. A five-year-old account alone does not make every withdrawal tax-free.

Who is this for?

Check modified AGI eligibility before comparing future tax rates. A worker early in a career might value paying tax now, but emergency savings, employer matching, debt costs, and investment risk also matter. There is no universal tax-rate forecast that settles the choice for every household. If you expect income close to a phase-out, calculate eligibility using the tax return rather than gross salary alone.

Tax treatment

The owner has no lifetime Roth IRA required minimum distributions. Qualified earnings distributions generally require the Roth IRA five-tax-year period plus age 59½, disability, death, or a qualifying first-home condition within its limit. Inherited Roth IRAs have beneficiary distribution requirements. State treatment should be checked separately.

Contribution rules

The 2026 combined regular IRA limit is $7,500, or $8,600 at age 50 or older, subject to compensation. Direct Roth contributions phase out at modified AGI of $153,000–$168,000 for single/head-of-household filers and $242,000–$252,000 for married filing jointly. Married filing separately while living with a spouse has a different $0–$10,000 range. A contribution must also fit the shared Traditional/Roth annual limit.

Investments and costs

Roth is a tax classification, not an investment strategy. A Roth holding cash has different risks and expected outcomes from one holding diversified funds or a concentrated stock. Compare account and fund costs, confirm beneficiary instructions, and check whether a deposit was actually invested or remains in settlement cash.

Withdrawals and restrictions

IRS ordering rules generally distribute regular contributions first, then conversions and rollovers, then earnings. Regular contributions can generally be withdrawn without income tax or the early-distribution additional tax. Conversions have separate five-year penalty considerations. Do not treat an earnings withdrawal as a contribution simply because the account balance has fallen.

Worked example and decision checklist

Hypothetical shared-limit example: a 40-year-old contributes $3,000 to a Traditional IRA in 2026. Before compensation and Roth income restrictions, at most $4,500 of regular IRA contribution space remains. Opening another account creates no additional allowance. Keep a contribution ledger by tax year, including amounts at every provider, and reconcile it with tax forms. For a conversion, request a tax estimate before moving assets; a conversion may create taxable income even though there is no direct-contribution income cap.

Sources and scope

• 2026 retirement limits — IRS
• Publication 590-A: IRA contributions — IRS
• Publication 590-B: IRA distributions — IRS

Updated October 21, 2026. Prepared with AI assistance; no independent professional review is claimed. Examples are hypothetical. Editorial policy and corrections.