What is a Roth IRA?
OK, so before we get into what a Roth IRA is, we should probably talk about taxes and different investment accounts. Check out my other blog post on that topic.
What is a Roth IRA? An investment account with an after-tax wrapper.
In what situations does contributing to a Roth IRA make sense?
- You've gotten your free money by contributing enough to an employer 401(k) / 403(b) to get the employer matching contribution
- You aren't worried about trying to reduce your current year’s taxable income by contributing to a retirement account
- You want tax-free growth and to be able to distribute from the account tax-free in retirement.
How much can I contribute to a Roth IRA in 2026?
- $7,500
- An additional $1,100 if you are age 50 or older
- Note - you must have at least as much earned income as you contribute to your Roth IRA
- Additionally, if you make too much money, you are not eligible to contribute directly to a Roth IRA. In 2026, that means $153,000 for a single person or $242,000 for a married couple filing jointly. Technically, it's not an all-or-nothing calculation on income. Once you reach the aforementioned income levels, your Roth IRA contribution eligibility phases out (reduces) until it hits zero.
- Additionally, and especially helpful when you have some of these income limit qualifiers, you can make a contribution for the current year all the way up until April 15 of the following year. So if you aren't sure how much money you're gonna make in 2026, you can wait until you file your taxes in early 2027 and make a contribution for the 2026 tax year all the way up until April 15, 2027.
So where can you open up a Roth IRA? A lot of different places. You can do it on your own through large retail broker firms like Vanguard, Fidelity, Charles Schwab, etc. You can alternately have your financial advisor open up an account for you. When I help clients manage investments, I use Charles Schwab or Betterment as the custodian.
So what kind of investments can you buy in a Roth IRA? Technically, it's whatever the custodian will allow you to buy. Generally, that means stocks, bonds, mutual funds, and exchange trade funds (ETFs). Less commonly used, but still available to most folks are options or other derivatives that you can trade. Since you typically want your tax-free Roth IRA account to grow as much as possible, I usually don't recommend much in the way of cash or bonds within my clients’ Roth IRA investment allocation. So usually it ends up being fairly heavy on US and international stock funds.
So what happens if I need to take money out of my Roth IRA?
- If you are age 59 1/2 or older, there are no taxes or penalties when you withdraw from the Roth IRA.
- If you are not yet age 59 1/2, you can withdraw your contributed amounts without taxes or penalties. For example - let’s say you have a Roth IRA with a current value of $100,000, and over the years you contributed $25,000, and then it grew by that additional $75,000. The IRS considers any withdrawals from a Roth IRA to be first from contributed amounts. So you could withdraw up to $25,000 without incurring any taxes or early withdrawal penalties.
- If you had converted any pre-tax retirement amount account money into your Roth IRA, as long as you have cleared some hurdles (5 years after contribution to any Roth IRA, 5 years after each conversion), you can withdraw converted amounts from your Roth IRA without paying any taxes or early withdrawal penalties.
- And then, lastly, if you have to withdraw any earnings before your age 59 1/2, you pay taxes and a 10% early withdrawal penalty on that amount.
- Please note that there are some exceptions to the tax and penalty rules for people who have different situations (first time homebuyers, economic hardship, etc.) as the reason for why they had to withdraw from the Roth IRA. The rules are very detailed and complex, and I recommend speaking with your tax professional about the particulars of your situation.
OK, so it seems unfair that you can't contribute directly to a Roth IRA if you make too much money, right? Well, not to fear. There is a legal IRS-approved workaround known as the Backdoor Roth IRA. The mechanics of this are complicated and you have to do it right to avoid incurring taxes and penalties. Check out my blog post on this topic. But in the meantime, please speak with your financial advisor and or tax professional before you attempt to do this on your own.
Important Note: Tax rules are complex and subject to change. The information provided here is general in nature and should not be relied upon as tax advice. Always review decisions with your CPA or qualified tax professional before taking action.