What are the benefits of a Roth IRA and how do these accounts work?
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. With a Roth IRA account, you won’t pay taxes as your money potentially grows, and you can make tax-free withdrawals during retirement. These plans are important because they combine the power of compounding with the benefit of tax-free growth. Roth IRAs aren’t offered through employers but can be set up fairly easily. Generally speaking, you can fund a Roth IRA account in addition to a 401(k) or SEP IRA retirement plan. The contribution limits for a Roth IRA are separate from the contribution limits for a 401(k) or SEP IRA. However, the contribution limits for a Roth IRA are not separate from those for a traditional IRA. For example, you can contribute to both your Roth IRA and traditional IRA in the same year, but the combined contributions can’t equal more than the annual contribution limit.
Deciding when and how to use Roth accounts and the size of your Roth accounts relative to your pre-tax retirement accounts is a balancing act for most. Factors that may influence this decision include your age, life expectancy, the size of your assets, tax bracket (today and projected for future), income level, budget (income needs), and a host of other circumstances. We don’t always know what the future holds and having both types of retirement accounts can help you increase your savings over time and provide a lot of additional flexibility. Because everyone has a different situation and there are many strategies to choose from, there are many areas of opportunity where a Roth account may be beneficial.
You have until tax day in mid-April 2026 to complete a 2025 Roth IRA Contribution. If you’re married filing jointly or a qualifying widow(er): If your modified AGI is less than $230,000, then you can contribute up to the $7,000 contribution limit ($8,000 if you’re age 50 or older) in 2025. If your modified AGI is between $236,000 and $246,000, you are eligible to contribute, but you’ll have a reduced limit. The value of that limit is calculated using a formula based on your AGI and filing status. If your modified AGI is higher than $246,000, you are unable to directly contribute to a Roth IRA that year. If you’re single, a head of household, or married filing separately and you did not live with your spouse at any time during the year: If your modified AGI is less than $150,000, you’re able to contribute up to the annual limit, and if your modified AGI is between $150,000 and $165,000, you’ll be held to a reduced limit. You’d be ineligible to contribute directly to a Roth IRA in 2024 if your modified AGI is over $165,000.
If you earn more than the respective limit for your tax filing status, then you are not permitted to make Roth IRA contributions, and the Backdoor Roth IRA structure will have to be employed. The Backdoor Roth IRA process involves making non-deductible traditional IRA contributions and then converting them to a Roth IRA. That’s why they are called “backdoor IRAs,” because your entry point is not through the normal “front door.” Roth strategies can potentially help you reduce Medicare costs / premium surcharges in the future, which is known as the income-related monthly adjustment amount (IRMAA).
Who are Roth IRAs best for? What type of consumers should consider them over other options?
A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future, making tax-free withdrawals even more advantageous. You can contribute to a Roth IRA at any age as long as you have a qualifying earned income. Also noteworthy, if you pass your Roth IRA onto your heirs, their withdrawals will be income tax-free.
Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans. The reason these plans are so important is that they combine the power of compounding with the benefit of tax-free growth. For most people, maximizing contributions to these plans makes sense, whether on a pre-tax or after-tax (Roth) basis. A key part of a tax planning strategy is reducing taxes from withdrawn funds from tax-deferred accounts, such as 401(k)s or IRAs.
Whether or not you can make contributions to a Roth IRA depends on your tax filing status and your modified adjusted gross income (MAGI). High-income professionals do not qualify to make Roth contributions. Back-door Roth IRAs allow you to make non-deductible traditional IRA contributions and then convert them to a Roth IRA.
Don’t Forget to Also Consider a Roth Conversion Strategy
One effective strategy many overlook is converting previously funded tax-deferred funds to a Roth IRA or 401(k). While the conversion amount is taxable in the year it is converted, the upside is these Roth accounts let your retirement savings grow tax-free and are not taxable when withdrawn (as long as you’re 59.5 or older and have owned a Roth for at least five years). Working with your accountant on this will be necessary to ensure that the conversions do not inadvertently move you up to the higher tax bracket (this calculation will be based on your adjusted gross income each year).
You also want to ensure that your Roth conversions don’t result in higher Medicare premiums. IRMAA stands for “income-related monthly adjustment amount.” It’s an add-on cost that Medicare Part B and Part D beneficiaries must pay based on their modified adjusted gross income, or MAGI. The increase in taxable income resulting from a Roth IRA conversion could cause the Medicare Part B beneficiary to be pushed into a higher “income tier.” Note that the Center for Medicare and Medicaid Services (CMS) determines IRMAA charges for a particular year based on the MAGI reported on the Medicare Part B beneficiary’s federal income tax return from two years ago. For example, 2025 Medicare Part B monthly premiums will be based on a Medicare Part B beneficiary’s 2023 MAGI.
Also, if you are converting part of a traditional IRA, rollover IRA, 401(k), 403(b), SEP IRA to a Roth IRA in 2025, you should be aware of a new rule that requires all Required Minimum Distributions (RMDs) to be taken first. Previously, only the RMD on the account being converted or partially converted had to be taken before a conversion. Now, all RMDs across all required accounts must be withdrawn before any Roth conversion should occur. Failing to follow this sequence could result in penalties or the automatic removal of the unfulfilled RMD from the Roth IRA after conversion.
Since a Roth IRA conversion is taxable, federal and state income taxes must be paid in full in the year of conversion on the amount converted. The IRA custodian does not withhold federal and state income taxes when a Roth conversion is completed. The converted Roth IRA owner is responsible for paying the federal and state income taxes due on conversions. The payment of the taxes due is usually made through a quarterly federal and state estimated tax payment. If the converted Roth IRA owner does not have sufficient liquid assets to pay the taxes due, then the traditional owner is advised not to perform a Roth IRA conversion.
How do Roth IRA withdrawals work? Can you pull money out at any time?
There is no need to take required minimum distributions with a Roth IRA (unlike a Traditional IRA). Withdrawals can be taken out tax-free and penalty-free, provided you’re age 59.5 or older and have met the minimum account holding period (currently five years). You can be assessed a 10% early withdrawal penalty if you don’t follow the guidelines. There are exceptions to the early withdrawal penalty, such as a first-time home purchase, college expenses, and birth or adoption expenses.
Are there any downsides to Roth IRAs?
There are no current-year tax benefits for Roth IRAs as there are with many other types of retirement accounts. So these accounts don’t serve to reduce your upfront taxes like other retirement accounts do. It’s important, however, not to let the upfront tax bill prevent you from moving your retirement funds from accounts that are taxed no matter when you take them out into accounts that are tax-free. The point is to not be shortsighted at the expense of being hit with large tax payments in retirement.