How Does a Roth IRA Work?

I’ve worked for a few companies that offered retirement plans. I also chose to save in a Roth IRA to prepare for retirement.

Understanding what a Roth IRA is and how it works lets you determine whether this investment product is right for your retirement goals. The following information can help.

What Is a Roth IRA?

A Roth Individual Retirement Account (IRA) lets you invest after-tax dollars for retirement. The investment options include stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

What Are the Roth IRA Income Limits?

You must have earned income that falls within specific limits to open and fund a Roth IRA:

• Your modified adjusted gross income (MAGI) is your adjusted gross income from your annual tax return.

• Your total income minus tax credits, adjustments, and deductions, with some of these credits, adjustments, and deductions added back in, determines your MAGI.

• Your MAGI and tax-filing status determine whether you can make a full, partial, or no contribution to a Roth IRA for the tax year.

The Roth IRA income requirements for 2026 are as follows:

 Single Filers/Heads of Household:

• MAGI < $153,000: Can contribute the full amount

• MAGI $153,000 to $168,000: Can contribute a reduced amount

• MAGI ≥ $168,000: Not eligible to contribute directly

Married Couples Filing Jointly:

• MAGI < $242,000: Can contribute the full amount

• MAGI $242,000 to $252,000: Can contribute a reduced amount 

• MAGI ≥ $252,000: Not eligible to contribute directly

What Are the Roth IRA Contribution Limits?

The contribution limits for a Roth IRA can change annually. In 2026, the limits are $7,500 for workers under 50 and $8,600 for workers 50 or older.

The contribution limits apply to all types of IRAs:

• If you have a traditional and a Roth IRA, you can contribute the maximum across both accounts annually.

• If your income limits you to a partial Roth IRA contribution, you can make up the difference by contributing to a traditional IRA up to the total contribution limit for the year.

• Because spouses have independent contribution limits, a non-working spouse can leverage the earned income from a working spouse to contribute.

If you earn too much to invest using a Roth IRA, you might have other options to access tax-free growth potential. For instance, if your employer offers a Roth 401(k) plan, or you’re self-employed and have a self-employed plan, you can gain the benefits of a Roth IRA without the income restrictions.  Conversely, you might use a strategy called a backdoor Roth IRA, which enables high earners to convert nondeductible contributions made to a traditional IRA into a Roth IRA.

What Are the Roth IRA Withdrawal Rules?

Because contributions to a Roth IRA are made with after-tax dollars, withdrawals of the contributions are tax-free and penalty-free. However, the investment gains can be taxable and subject to a 10% early withdrawal penalty:

• If you are under age 59 ½, the earnings are subject to tax and a 10% penalty.

• If you are 59 ½ or older and have held your account for less than 5 years from the beginning of the tax year of your first contribution, the earnings are taxable.

• If you are 59 ½ or older and have held your account for at least 5 years from the beginning of the tax year of your first contribution, the earnings are tax-free and penalty-free.

Exceptions to the 10% early withdrawal penalty include:

• Up to $10,000 to buy your first home

• Up to $5,000 for expenses for a birth or adoption

• Qualified education expenses, such as college tuition

• For unreimbursed medical expenses above 7.5% of adjusted gross income (AGI)

• To pay for health insurance when you're unemployed

If you inherited a Roth IRA or plan to leave your account to an heir, any gains can be withdrawn without penalty. However, although these exclusions can save you from the 10% penalty, they may not save you from paying income tax on earnings if the account hasn't been funded for at least 5 years from the beginning of the tax year of the initial funding.

*This information is for educational purposes only.

Do you have a Roth IRA, or do you plan to open one? Let me know in the comments!