- Roth IRAs can be a great source of tax-free retirement income.
- Accounts are funded with after-tax contributions and grow tax-free.
- Contributions can be withdrawn at any time, allowing for more financial flexibility than other types of retirement accounts.
- Annual contributions are limited to $7,000 if you're younger than 50 or $8,000 if you're age 50 and older.
When saving for retirement, a popular option is to use a Roth IRA. Some people may already be familiar with traditional style plans, but wonder, “What is a Roth IRA?” Here’s what you’ll need to know and how you can decide if this popular investing choice is right for you.
What Is a Roth IRA?
A Roth IRA (individual retirement account) is a special type of tax-advantaged investment account intended to help you save for your retirement years.
Unlike most traditional-style savings plans (where taxes are deferred until retirement), a Roth-style account works the opposite. Contributions are made with after-tax money, which enables them to grow and be available for withdrawal in the future tax-free (after you reach age 59 and 1/2).
This type of arrangement could be more advantageous for some savers depending on their tax situation and financial goals. Roth IRAs may also serve as a good supplementary option for those who are already utilizing workplace retirement plans such as a 401(k) or pension.
How Does a Roth IRA Work?
Roth IRAs are easy to set up and start funding. Here's how it works:
Open an Account
Begin by selecting a trustworthy financial service provider that offers Roth IRA accounts. PNC offers several retirement savings options, including Roth IRAs and traditional IRAs.
Make Your Contributions
As long as you have earned income and it is below the IRS's modified adjusted gross income (MAGI) threshold, you're allowed to contribute to a Roth IRA. MAGI is the adjusted gross income reported on your federal return plus a few items such as exempt or excluded income and certain deductions. As of 2025, the MAGI limit to make a full contribution is $150,000 for single filers and $236,000 for those filing jointly. [1]
The Roth IRA maximum annual contribution limits for 2025 are: [1]
- $7,000 for those under age 50
- $8,000 for those age 50 or older
Contributions for the current tax year can be made until Tax Day of the following calendar year, typically April 15th.
Note that because IRAs are the property of individuals, couples can effectively double their savings when each partner opens an account.
Earned income may be from a traditional job or self-employment. However, it could also be from other sources such as scholarships, alimony, or even spousal contributions (if you're married). [2]
Manage Your Investments
Just as with any good retirement savings account, you'll want to construct a portfolio that minimizes risk while also providing a reasonable rate of return. You can accomplish this by choosing investments that will help meet your specific financial needs, such as:
- Mutual funds
- ETFs (exchange-traded funds)
- Individual stocks
- Bonds
- Cash-based products such as CDs and money market accounts
It's highly recommended that you periodically review all of the investments inside your retirement nest egg (including your Roth IRA) and evaluate its performance. Rebalance your funds and adjust as needed to ensure you're heading towards your desired targets.
Withdrawals
Like other retirement accounts, you can begin taking qualified distributions from your Roth IRA tax-free after age 59-1/2. For withdrawals to be considered qualified, the account needs to be opened and funded for at least five years.[3]
If you need access to your savings before age 59-1/2, the following rules should be observed:
- Contributions: Any money you've saved to the Roth IRA can be withdrawn tax- and penalty-free at any time for any reason. This is because you've technically already paid taxes on these funds.
- Earnings: The money that's grown on top of your contributions must stay inside the Roth IRA until you're 59-1/2 years old. Otherwise, it will likely be subject to taxes and a 10% early withdrawal penalty.
You can also withdraw earnings without penalty for meeting certain "hardship" requirements.[4] These generally include uses like paying for unreimbursed medical expenses, disability, higher education expenses, or similar needs.
Benefits of a Roth IRA
There are several great reasons to make a Roth IRA part of your retirement savings strategy.
1. Tax-Free Growth
Earnings on contributions will grow tax-free. This means you could potentially take advantage of decades of uninhibited compound investment growth.
2. Tax-Free Withdrawals
After age 59-1/2, distributions from your Roth will be tax-free. This can help ease unwanted financial stress by reducing your overall tax burden during retirement.
3. Access to Your Contributions
Because Roth contributions can be withdrawn anytime, these accounts provide some financial flexibility. You could pay for an unexpected emergency or use the funds for a major purchase (such as a down payment on a house).
4. No RMDs
Because distributions from a Roth IRA are tax-free, that means there won't be any required minimum distributions (RMDs). Normally, with traditional style retirement accounts, RMDs start at age 73 and continue every year thereafter. However, Roth IRAs aren't subject to this rule, meaning you can manage the distributions as you wish.
5. Estate Planning Benefits
Roth IRAs can help you build a powerful financial legacy for your beneficiaries. Those who inherit a Roth IRA have a 10-year window to exhaust its funds tax-free as they see fit. [5]
Roth IRA vs Traditional IRA
When opening an IRA, most people will be asked to choose between a Roth and a traditional IRA. Here are the similarities and differences between the two options.
Tax Implications
Traditional IRAs are funded with pre-tax money, whereas Roth contributions are made using after-tax income. Therefore, when you retire, you'll owe taxes on the funds you withdraw from your traditional IRA, while Roth withdrawals will be tax-free.
Contribution Limits
The IRS currently has the same contribution limits for both Roth and traditional IRAs. However, it should be noted that this limit applies to the total amount saved across both accounts, not each individually.
For example, in 2025, if you put $6,000 into your Roth and $1,000 into a traditional IRA, then you've reached the $7,000 maximum and cannot make any further contributions to either IRA for the tax year.
Income Requirements
The IRS has specific income and eligibility requirements for who can contribute to both Roth and traditional IRAs:
Generally speaking, anyone can save money in a traditional IRA. However, if your MAGI is above a certain threshold, then your contributions will not be tax-deductible.
Roth IRAs have different MAGI thresholds that are generally higher than those for traditional IRA deductible contributions. However, if you exceed these values, then you cannot contribute to a Roth IRA directly.
Instead, adding money to your account would require a "Roth conversion," where funds from a traditional-style retirement plan are transferred to your Roth and taxed.
Note that these MAGI thresholds change each year due to inflation. For the latest information, please check the IRS's official website. [6]
RMDs
As mentioned previously, the IRS requires that RMDs from traditional-style retirement accounts (including traditional IRAs) begin at age 73. Roth IRAs do not have RMDs.
Choosing Between a Traditional or Roth IRA
Both types of IRAs offer financial incentives. However, choosing between the two will depend on the following:
- Your retirement income goals
- Tax considerations
- Eligibility requirements
Consider your financial situation from a holistic perspective to determine how one account or the other may enhance your desired outcome.
Who Should Consider a Roth IRA?
Roth IRAs are a popular go-to for younger investors. Because these individuals are typically in lower tax brackets, they'll potentially pay less in tax now than they would if they waited until later in life.
Younger investors also generally earn less than their older counterparts, meaning they'll usually have little trouble staying under the IRS income limits. This may become more challenging as they progress in their careers and eventually exceed the MAGI thresholds for Roth IRA eligibility.
Of course, investors of all ages may benefit from Roth IRAs in several ways. For instance, an individual who is nearing retirement may wish to open an account and begin making conversions from their traditional style plans to a Roth. This strategy helps reduce future RMD amounts and may lead to significant tax savings over time.
Potential Drawbacks of a Roth IRA
Although using a Roth IRA has many advantages, there are still some potential caveats. Here are a few downsides to consider:
- Contributions are limited. Because the amount you can save is so low, you may find it difficult to save enough for retirement using a Roth IRA alone. You may want to consider utilizing other savings options like workplace retirement plans or even personal savings.
- Investments could lose value. As with all financial assets, returns are never guaranteed. Before committing your funds, use caution and understand the risks involved.
- Earnings are not accessible. While Roth contributions can be withdrawn tax and penalty-free, earnings cannot.
Certain distribution guidelines and/or additional tax filing requirements may be applicable. Always consult a tax professional regarding tax advice.
- Your tax situation may change. While many people assume they'll be in a higher tax bracket during retirement, this is not always the case. Those who plan to spend less or take minimal withdrawals from their nest eggs might be in a lower tax bracket, meaning traditional-style options may be more advantageous.
Final Thoughts
Roth IRAs can be a great way to save for retirement and produce tax-free income later in life. They also offer many other unique benefits, such as access to your contributions and no RMDs in the future. These unique investment tools are worth careful consideration in any retirement planning strategy.
