With an individual retirement account (IRA), you can save and invest for retirement separately from an employer-sponsored plan. But each of 2 popular types of IRAs—traditional and Roth—has its own tax rules. Here are some answers to questions you might have about how Roth IRAs work. These answers could help you decide which type of IRA makes the most sense for you, plus help you make the most of a Roth IRA if you open one.
Are Roth IRA contributions tax-deductible?
No, Roth IRA contributions are not tax-deductible. Unlike most tax-deferred traditional IRA or 401(k) contributions, a Roth IRA does not reduce taxable income or your tax bill. Instead, a Roth IRA saves the potential tax break for when you make qualified withdrawals.1
Are investments in Roth IRAs taxed?
Investment earnings, including capital gains, dividends, and interest (except for Unrelated Business Taxable Income (UBTI)) aren’t taxed while the money remains in a Roth IRA. This is an advantage compared to a taxable account. If you sell an investment in a taxable account, you’d potentially owe capital gains taxes on the investment if you sold it for more than you bought it for. You would also potentially owe taxes on any dividends, taxable interest, or capital gains distributions from your investments, even if you opt to reinvest them rather than receive them in cash. Because you’re not shelling out money on taxes while your assets remain in a Roth IRA, you could potentially keep more of what you earn in this retirement account than in a taxable account.
Do Roth IRA withdrawals count as taxable income?
Whether Roth IRA withdrawals count as taxable income depends on 2 key factors: your age and how long you’ve had the account.
You fund a Roth IRA with after-tax dollars, which means you can withdraw those contributions whenever you like without facing taxes or penalties. For example, if you contributed $12,000 over 2 years and your Roth IRA has grown to $13,200, you can take out the original $12,000 without taxes and penalties. However, if you withdraw any of the $1,200 of growth and your Roth IRA hasn’t met the 5-year aging rule or you’re not yet 59½, you’d generally owe a 10% early withdrawal penalty, plus income tax on the amount of withdrawn earnings.
There are exceptions. You can withdraw earnings penalty-free before the 5-year aging rule or before age 59½ and only be subject to income taxes if you use funds toward:
- Qualified education expenses, such as college tuition
- Expenses for a birth or adoption, up to $5,000
- Some unreimbursed medical expenses (if they are greater than 7.5% of adjusted gross income) or to pay for health insurance when you’re unemployed
- Buying your first home, up to $10,000 (if you have the account for 5 or more years, you may not incur taxes either in this case)
If any of these situations apply to you, you may need to file IRS form 5329Opens in a new window to claim the exception.
Do you report Roth IRA withdrawals on your taxes?
Yes, you’ll need to report Roth IRA withdrawals when you file your annual tax return if you have a non-qualified withdrawal. To do this, complete part 3 of IRS Form 8606Opens in a new window. It will walk you through a calculation to determine what part of your Roth IRA withdrawals, if any, should count as taxable income. If you do owe taxes, you’ll need to include that taxable income on your IRS Form 1040 individual tax return.
How are Roth and traditional IRAs taxed differently?
The main difference is when you receive the tax break. Traditional IRAs let you deduct your contributions, if you’re eligible, which reduces your taxable income in the year in which the contribution was made. In other words, you could save on taxes upfront. But when you take money out of a traditional IRA in retirement, you’ll owe taxes on every withdrawal or on the portion of each withdrawal that’s made up of contributions you took a deduction on and their associated earnings.
Roth IRAs don’t provide an upfront tax deduction because they’re funded with after-tax dollars. But when you reach age 59½, Roth IRA withdrawals are penalty-free and potentially tax-free, provided your account meets the 5-year aging rule.
How are Roth IRA conversions taxed?
A Roth IRA conversion involves moving money from a pre-tax retirement account, like a traditional IRA or 401(k), into a Roth. You’ll owe income tax on the amount you convert, and those taxes will be due when you file your tax return for the year. After that, the converted balance can be withdrawn tax-free and penalty-free if the withdrawal is performed 5 or more years after the start of the tax year in which the conversion took place. This 5-year aging rule applies to each individual conversion you perform. Note that converted balances can be withdrawn penalty-free without meeting this rule’s requirement if an exception is met, such as being 59½, among others.
Calculating taxes on a Roth IRA conversion can get complicated if you’re converting both deductible contributions and nondeductible ones. You might have nondeductible contributions in a traditional IRA if you earned too much to claim the traditional IRA deduction. If you convert those dollars, that’s considered a backdoor Roth IRA contribution. Your tax liability will be subject to the pro rata rule. In other words, the taxable portion of your conversion will depend upon the percentage of the conversion amount that has been previously taxed (tax-deductible or pre-tax contributions).
Let’s say you have combined traditional IRAs worth $50,000, which have 10% in nondeductible contributions, 90% in deductible contributions, and have experienced no earnings. If you want to convert $5,000 to a Roth IRA, then 90% of the money you decide to convert would be taxable. You’d pay taxes on $4,500, or 90% of the $5,000. You don’t get to cherry pick and only choose to convert your nondeductible contributions. Note that if this example included earnings as well as contributions that those amounts would be taxable.
How to decide between the tax benefits of a traditional IRA and a Roth IRA
When deciding between a traditional or Roth IRA, consider the following factors:
- Your tax bracket: A traditional IRA could save you more if you think your tax rate is higher today than it will be in retirement when you’d pay taxes on traditional IRA withdrawals. A Roth IRA, on the other hand, could be more effective if you expect to be in a higher tax bracket later when you wouldn’t have to pay taxes on withdrawals.
- Tax- and penalty-free access: Do you expect to access your savings before age 59½? A Roth IRA lets you withdraw your contributions tax- and penalty-free. A traditional IRA could be more restrictive. You could owe income tax and a possible 10% penalty for taking contributions out early because you haven’t paid taxes on those dollars yet.
- Whether you want to pay taxes now or later: Adding $5,000 to a Roth IRA could give you more in after-tax future retirement savings than a $5,000 pre-tax contribution to a traditional IRA, assuming equal tax rates at the time of contribution and the time of withdrawal. Before accounting for taxes, the values of both accounts are the same but down the road, you’d owe taxes on withdrawals from a traditional IRA, but you wouldn’t owe taxes on qualified Roth IRA withdrawals.
- Your legacy plan: Consider how you’d like to leave your retirement savings as an inheritance. A traditional IRA requires you to withdraw at least a portion of your balance, called a required minimum distribution (RMD), beginning at age 73, whether you need the money or not. A Roth IRA does not have RMDs. You could continue potentially growing your money for your heirs for as long as you live. Just keep in mind that your heirs will have requirements to withdraw from an inherited Roth IRA but, in most cases, those withdrawals would be tax- and penalty-free.
How to open a Roth IRA
If you think a Roth IRA makes sense, follow these steps:
Step 1: Check your eligibility
How much you can contribute to a Roth IRA—or if you can contribute at all—is dictated by your income, specifically your household’s modified adjusted gross income (MAGI). This is your adjusted gross income (gross income minus tax credits, adjustments, and deductions), with some of those credits, adjustments, and deductions added back in.
| Roth IRA income requirements for 2024 | ||
|---|---|---|
| Filing status | Modified adjusted gross income (MAGI) | Contribution limit |
| Single individuals | < $146,000 | $7,000 |
| ≥ $146,000 but < $161,000 | Partial contribution | |
| ≥ $161,000 | Not eligible | |
| Married (filing joint returns) | < $230,000 | $7,000 |
| ≥ $230,000 but < $240,000 | Partial contribution | |
| ≥ $240,000 | Not eligible | |
| Married (filing separately)2 | ||
| < $10,000 | Partial contribution | |
| ≥ $10,000 | Not eligible | |
Source: "Amount of Roth IRA contributions that you can make for 2024," Internal Revenue Service, September 10, 2024.
| Roth IRA income requirements for 2025 | ||
|---|---|---|
| Filing status | Modified adjusted gross income (MAGI) | Contribution limit |
| Single individuals | < $150,000 | $7,000 |
| ≥ $150,000 but < $165,000 | Partial contribution | |
| ≥ $165,000 | Not eligible | |
| Married (filing joint returns) | < $236,000 | $7,000 |
| ≥ $236,000 but < $246,000 | Partial contribution | |
| ≥ $246,000 | Not eligible | |
| Married (filing separately)2 | ||
| < $10,000 | Partial contribution | |
| ≥ $10,000 | Not eligible | |
Source: "401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000," Internal Revenue Service, November 1, 2024.
Step 2: Open the account
Brokerage firms, banks, and online financial institutions offer Roth IRAs. Check the fees they charge and investment options they offer to help you decide which option to choose. To open an account, be prepared to provide your Social Security number, income, and employment status, among other personal details.
Step 3: Fund your account
After setting up your Roth IRA, you could link your bank account to make your first contribution. At Fidelity, you also have the option to deposit a check via mobile upload or mail. You could even direct deposit paychecks to eligible Fidelity accounts.
Step 4: Start investing
IRAs typically offer a wide range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Learn more about investment types for building a portfolio. You could also consider setting up recurring investments, up to your annual contribution limit. With recurring investments, you regularly contribute to the account without manual maintenance after the initial setup.