You do not need an employer to save for retirement. An individual retirement account (IRA) is one you open yourself, and it comes in two forms: Traditional and Roth. A Traditional IRA works like a 401(k), taking pre-tax money and taxing the withdrawals. A Roth IRA reverses that: you contribute money you have already paid tax on, and qualified withdrawals in retirement are entirely tax-free. A Roth trades a deduction now for tax-free income later, and it is the better trade whenever you expect your tax rate in retirement to be the same as, or higher than, it is today.

Roth IRAs are still underused. According to the Investment Company Institute, about 24% of U.S. households owned a Roth IRA in 2022, even though it is one of the few ways to lock in today's tax rate on money you will need decades from now.

A Roth IRA grows tax-free, and you can withdraw your contributions and earnings tax-free once you are 59 1/2 and the account has been open at least five years. Because you already paid the tax going in, there is no surprise tax bill in retirement, which matters most when you are living on a fixed income.

How a Roth IRA compares to a Traditional IRA

The main difference is when you pay tax. A Roth taxes contributions now for tax-free withdrawals later; a Traditional IRA skips tax now and taxes withdrawals in retirement.

On age: there is no minimum age to contribute to either type of IRA. Anyone with earned income can contribute, and a minor with a job can have a custodial Roth IRA opened and managed by a parent or guardian.

How a Roth IRA works

A Roth IRA holds after-tax money from a qualifying source and invests it. That money usually comes from your job, but it can also be:

• A rollover from a Roth 401(k)
• A conversion from a Traditional IRA or 401(k)
• A spousal contribution
• Another transfer

Your contributions and their growth compound tax-free, and once you meet the withdrawal rules (age 59 1/2 and a five-year-old account), you take the money out tax-free.

2026 Roth IRA contribution and income limits

For 2026, you can contribute up to $7,500 to a Roth IRA, or $8,600 if you are 50 or older, which includes a $1,100 catch-up. This is a combined limit across every IRA you own. Contribute $3,000 to one IRA and you have $4,500 of room left across the rest ($5,600 if you are 50 or older).

Whether you can contribute the full amount depends on your modified adjusted gross income (MAGI):

If your income is too high to contribute directly, you can fund a Traditional IRA instead (no income limit) or use a backdoor Roth conversion. See Roth IRA income limits for the phase-out math.

Allowable investments in a Roth IRA

Once funded, a Roth IRA can hold mutual funds, stocks, bonds, ETFs, CDs, and money market funds. You cannot contribute cryptocurrency directly, though "Bitcoin IRAs" offer indirect exposure. Other prohibited holdings include life insurance, collectibles and antiques, and real estate for personal use.

How to open a Roth IRA

Step 1: Check your eligibility. Your ability to contribute depends on your MAGI and the current-year limits above. If you earn too much, you may be partially or fully phased out of direct contributions.

Step 2: Choose a provider. Banks, brokerages, and robo-advisors all offer Roth IRAs. Compare account and trading fees, fund expense ratios, the range of investments, ease of use, and any minimum to open.

Step 3: Gather your information. You will need your Social Security number, a government-issued ID, employment details, and bank account information for funding.

Step 4: Complete the application. This usually takes a few minutes online. You will name beneficiaries as part of the process.

Step 5: Fund the account. Transfer money from your bank, roll over another retirement account, or set up recurring contributions, keeping the annual limit in mind.

Step 6: Choose your investments. Options include stocks, bonds, mutual funds, and ETFs. If you are unsure, a target-date fund adjusts its mix automatically as you approach retirement, or you can work with a financial advisor.

Step 7: Automate contributions. Small, regular contributions compound significantly over time. Aim to contribute as much as you can toward the annual limit.

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Roth IRA rules

Every retirement account has rules about when and how you can take the money out. For a Roth IRA, the key ones are the age threshold and the five-year rule.

Withdrawal rules and the five-year rule

You can withdraw your contributions at any age, at any time, tax- and penalty-free, because you already paid tax on them. Earnings are different: to take those out tax- and penalty-free, you must be at least 59 1/2 and have had a Roth IRA open for at least five years. The five-year clock starts January 1 of the year of your first contribution.

One exception: a first-time homebuyer can withdraw up to $10,000 of earnings without the 10% penalty to buy, build, or rebuild a home, and must use the money within 120 days. The withdrawal is also tax-free if you meet the five-year rule.

Early-withdrawal penalty

If you withdraw earnings before 59 1/2 without qualifying for an exception (such as the homebuyer exception or a disability), you owe income tax on those earnings plus a 10% penalty. Your contributions are never penalized.

Tax benefits

A Roth IRA has no upfront deduction. In exchange, your investments grow tax-free and come out tax-free in retirement, and you never have to take required minimum distributions, so you can leave the account to grow or pass it to heirs.

How to withdraw

Once you are past 59 1/2 with a five-year-old account, contact your provider online or by phone to withdraw. Funds typically move by electronic transfer, wire, check, or a transfer to another account at the same institution.

Are Roth IRAs insured?

It depends on what the account holds. FDIC insurance covers up to $250,000 per depositor, per insured bank, per ownership category, and it applies only to deposit products like CDs and savings held in an IRA at an FDIC-insured bank, not to a 401(k). Multiple accounts of the same ownership type at the same bank are added together toward that $250,000 limit, not insured separately.

Securities in a Roth IRA (stocks, bonds, mutual funds, ETFs, annuities) are not FDIC-insured. At a brokerage, those are instead covered by SIPC against the failure of the firm, which is different from protection against investment losses. If your IRA cash at one bank is approaching $250,000, spreading it across ownership categories or institutions restores full coverage.

Final thoughts

Whether a Roth IRA fits comes down to the tax question: pay now or pay later. If your employer offers a 401(k) with a match, capture that first, then weigh a Roth IRA's pay-now structure against the 401(k)'s pay-later one. A Certified Financial Planner can model both against your expected retirement income.

Frequently asked questions

What is a Roth IRA?

A Roth IRA is an individual retirement account funded with after-tax dollars, so qualified withdrawals in retirement are tax-free. You get no deduction for contributing, but you also owe no tax when you take the money out, which is an advantage if you expect to be in the same or a higher tax bracket later.

What is a spousal Roth IRA?

A spousal Roth IRA lets a working spouse fund an IRA in the name of a spouse with little or no earned income. The couple must be married and file jointly, and combined earned income must cover both contributions. Each account has a single owner: whoever the account is titled to owns the money, regardless of who funded it.

Are Roth IRAs insured?

Deposit assets (such as CDs and cash) in a Roth IRA at an FDIC-insured bank are covered up to $250,000 per depositor, per bank, per ownership category. Securities like stocks, bonds, mutual funds, and ETFs are not FDIC-insured; at a brokerage they are covered by SIPC against firm failure, not against market losses.

Can you lose money in a Roth IRA?

Yes. A Roth IRA holds investments, and their value can fall with the market or from poor investment choices. Early withdrawals of earnings can also cost you taxes and a penalty. Diversifying your holdings reduces, but does not remove, the risk of loss.

Is it better to invest in a Roth IRA or a 401(k)?

If your employer matches 401(k) contributions, contribute enough to get the full match first, since that is an immediate return. Beyond the match, a Roth IRA often comes next for its tax-free growth and flexibility, then back to the 401(k) for its higher limit. If you can afford it, funding both is the strongest option.

How do you open and fund a Roth IRA?

Open a Roth IRA online with a broker, bank, or robo-advisor in a few minutes, then fund it by transferring money from your bank, rolling over another retirement account, or setting up automatic contributions. You choose the investments inside the account.

What are the eligibility requirements and contribution limits for a Roth IRA?

You need earned income (wages, salary, commissions, or self-employment income) to contribute, and your income must be under the IRS limits for a full contribution. For 2026, the limit is $7,500 for those under 50 and $8,600 for those 50 and older, with direct contributions phasing out above $153,000 of MAGI for single filers and $242,000 for joint filers.

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