Roth IRAs: Building Tax-Free Income for Retirement

June 13, 2025

When it comes to saving for retirement, most people think they will have to pay taxes on their income. This could happen now or later. Roth IRAs provide a special chance.

You can grow your retirement savings without paying taxes. You can also withdraw money tax-free if you meet certain requirements. While this might sound too good to be true, Roth IRAs are very real—and they can be an extremely effective tool for many investors.

Understanding the Basics: What Is a Roth IRA?

At its core, a Roth IRA is a type of individual retirement account funded with after-tax dollars. This means that, unlike traditional IRAs, you pay taxes on the money before you put it into a Roth IRA. Contributions to a Roth IRA are made with after-tax money.

When you pay taxes upfront, you get rewards later. Your investments can grow without taxes. You can take qualified distributions without paying taxes on your earnings if you meet certain conditions.

Roth IRAs can hold a wide variety of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The specific investment choices available to you will depend on the brokerage or financial institution you use.

How Roth IRAs Operate: Contributions, Income Limits, and Withdrawals

Roth IRAs provide important tax benefits. However, they have rules about how much you can contribute and who can join.

Contribution Limits

The IRS sets annual contribution limits for Roth IRAs. For 2025, most individuals can contribute a maximum of $7,000. Those aged 50 and older can add an extra $1,000 as a "catch-up" contribution. However, these limits apply across all IRA accounts you may own—meaning if you have both a traditional and Roth IRA, your combined contributions cannot exceed these annual limits.

Income Eligibility

Not everyone qualifies to contribute directly to a Roth IRA. Eligibility is based on your modified adjusted gross income (MAGI) and filing status. Your MAGI is essentially your total income after certain deductions and adjustments. If your income exceeds certain thresholds, your ability to contribute may be reduced (phased out) or eliminated entirely for the year.

Even if you exceed the income limits for direct contributions, there are still strategies you can use, such as a backdoor Roth IRA or contributing to a Roth 401(k) if your employer offers one. Both options allow high earners to take advantage of Roth-style tax benefits despite income restrictions.

Withdrawal Rules

One of the most appealing features of a Roth IRA is its flexible withdrawal rules. Because you contribute after-tax dollars, you can withdraw your contributions at any time without taxes or penalties. However, to withdraw investment earnings tax-free, you must meet two key conditions:

●     Be at least 59½ years old.

●     Have held the Roth IRA for at least five years from the beginning of the tax year in which you made your first contribution.

There are exceptions that allow for penalty-free withdrawals of earnings before age 59½ under certain circumstances, including:

●     First-time home purchases (up to $10,000)

●     Qualified education expenses

●     Birth or adoption expenses (up to $5,000)

●     Certain medical expenses exceeding 7.5% of your adjusted gross income

●     Health insurance premiums while unemployed

It's important to note that while these exceptions may avoid the 10% early withdrawal penalty, taxes may still apply if the five-year rule has not been met.

Comparing Roth IRAs and Traditional IRAs

When deciding between a Roth IRA and a traditional IRA, the primary consideration often centers on whether you want the tax benefits now or later.

●     Traditional IRA: Contributions may be tax-deductible (depending on income and participation in employer-sponsored retirement plans), but withdrawals in retirement are fully taxable.

●     Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals are entirely tax-free.

If you anticipate being in a higher tax bracket in retirement, or if you prefer the certainty of knowing your withdrawals will be tax-free, a Roth IRA may be the better choice.

Another major difference is how required minimum distributions (RMDs) are treated. Traditional IRAs mandate that you start taking distributions beginning at age 73. Roth IRAs, on the other hand, do not require RMDs during the account holder’s lifetime, allowing your investments to continue growing if you don’t need the money right away.

Legacy Planning Advantages

Roth IRAs also offer distinct estate planning benefits. Unlike other retirement accounts, Roth IRAs can be passed on to beneficiaries with tax advantages. Spouses who inherit a Roth IRA can generally treat the account as their own, maintaining tax-free growth and withdrawals if the five-year rule has been satisfied.

Non-spouse beneficiaries typically must empty the account within 10 years under current IRS rules, but they too benefit from tax-free withdrawals on qualified distributions as long as the five-year rule has been met.

Opening a Roth IRA: Getting Started

Starting a Roth IRA is relatively simple:

1. Choose a Provider:

Select a brokerage firm, bank, or financial institution that offers Roth IRAs. Compare fees, investment options, and available tools or guidance to find the best fit for your needs.

2. Fund Your Account:

Once your account is open, you can begin contributing—either through lump-sum deposits or automatic transfers from your bank account. Make sure to stay within the annual contribution limits and verify your eligibility based on income.

3. Invest Your Contributions:

The money in your Roth IRA isn’t automatically invested. You’ll need to select investments based on your risk tolerance, timeline, and retirement goals. Many providers offer guidance or access to financial professionals who can help you build an appropriate portfolio.

The Bottom Line

Roth IRAs offer a powerful combination of tax-free growth, flexible access to contributions, and estate planning benefits that make them an appealing option for many savers. By understanding how they work and how to maximize their advantages, you can potentially create a more secure, tax-efficient retirement plan.

Sources:

https://www.fidelity.com/learning-center/smart-money/how-does-a-roth-ira-work

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

A ROTH Conversion is a taxable event that may not be right for everyone. Consult your tax advisor regarding your situation.