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Roth IRA

Investment

Roth Individual Retirement Account

A US retirement account funded with after-tax dollars that grows and can be withdrawn tax-free in retirement, in contrast to a Traditional IRA which is funded pre-tax and taxed on withdrawal.

Definition

A Roth IRA is a US individual retirement account funded with after-tax dollars, meaning you get no tax deduction on contributions, but qualified withdrawals in retirement — including all investment growth — are completely tax-free. A Traditional IRA works the opposite way: contributions may be tax-deductible upfront, but withdrawals in retirement are taxed as ordinary income.

The choice between the two hinges on a bet about your future tax rate: a Roth IRA is generally more valuable if you expect to be in a higher tax bracket in retirement than you are today, while a Traditional IRA favors those expecting a lower bracket later.

Formula

There's no single "formula" for a Roth IRA itself, but the after-tax comparison between the two account types can be expressed as:

Roth IRA Future Value (after-tax) = Contribution × (1 + r)^n

Traditional IRA Future Value (after-tax) = [Contribution × (1 + r)^n] × (1 − Future Tax Rate)

where r is the annual growth rate and n is the number of years invested. Because the Roth contribution is already after-tax, no further tax adjustment applies at withdrawal.

Worked Example

You contribute $7,000 to a retirement account at age 30, and it grows at 7% annually for 35 years to $74,780 by retirement.

If it's a Roth IRA: You already paid tax on the $7,000, so the full $74,780 is yours tax-free at withdrawal.

If it's a Traditional IRA: You got an upfront deduction, but if you're taxed at 22% in retirement, you keep $74,780 × (1 − 0.22) = $58,328 after tax.

The Roth wins in this scenario because your retirement tax rate (22%) is assumed to be similar to or higher than your working-years rate. Use the Roth vs Traditional IRA calculator to model your own contribution, tax rates, and time horizon.

Key Things to Know

  • Contribution limits are shared: The IRS combined annual contribution limit across all your IRAs (Roth and Traditional) is the same regardless of how you split contributions between the two types.
  • Roth IRAs have no RMDs: Unlike Traditional IRAs and 401(k)s, Roth IRA owners are never forced to withdraw funds during their lifetime, making it a flexible legacy and estate-planning tool.
  • Employer plans often complement IRAs: Many savers contribute to a 401(k) for the employer match first, then use a Roth or Traditional IRA for additional tax-advantaged savings.
  • Roth conversions are allowed: You can convert Traditional IRA funds to a Roth IRA by paying tax on the converted amount now, a strategy often used in lower-income years to lock in tax-free growth going forward.
  • Early withdrawal rules differ: Roth IRA contributions (but not earnings) can be withdrawn anytime tax- and penalty-free, while Traditional IRA withdrawals before 59½ generally trigger both tax and a 10% penalty.

Related Calculators

Roth vs Traditional IRA Calculator →Compare Roth IRA vs Traditional IRA after-tax value at retirement using 2025 tax rules. Instantly see which account leaves more in your pocket.

Related Terms

401(k)US Employer-Sponsored Retirement Savings PlanRMDRequired Minimum Distribution

Frequently Asked Questions

A Roth IRA is funded with after-tax dollars and grows tax-free, with qualified withdrawals in retirement owing no tax, while a Traditional IRA is funded with pre-tax (or deductible) dollars and withdrawals are taxed as ordinary income in retirement. Choosing between them largely comes down to whether you expect to be in a higher or lower tax bracket now versus in retirement.
Yes, Roth IRA contributions phase out at higher income levels — for 2026, the phase-out range is roughly $150,000-$165,000 for single filers and $236,000-$246,000 for married filing jointly, adjusted annually for inflation. Traditional IRAs have no income limit to contribute, though the tax deduction may phase out if you or your spouse have a workplace retirement plan.
Yes, you can withdraw your original contributions (not earnings) from a Roth IRA at any time, tax-free and penalty-free, since you already paid tax on that money. Withdrawing earnings before age 59½ and before the account is 5 years old, however, typically triggers both income tax and a 10% early withdrawal penalty.
No, Roth IRAs are not subject to RMDs during the original account owner's lifetime, unlike Traditional IRAs which require withdrawals starting at age 73 or 75. This makes a Roth IRA useful for legacy planning, since the funds can continue growing tax-free indefinitely if not needed.
If you expect your tax rate to be higher in retirement than it is today (common for younger savers early in their careers), a Roth IRA is often more advantageous since you lock in today's lower tax rate. If you expect your tax rate to be lower in retirement, a Traditional IRA's upfront deduction may save you more overall — use the Roth vs Traditional IRA calculator to compare your specific numbers.