What Is a Roth IRA? Rules, Taxes, and Who Qualifies

By Ed Robinson, Co-Founder & Co-CEO, Stash · FINRA Series 7 & 63 · Graduate Diploma in Financial Planning · Last updated June 10, 2026

A Roth IRA is a retirement account you fund with money you’ve already paid taxes on. The payoff comes later: if you follow IRS rules, qualified withdrawals in retirement are federally tax-free.

That tax setup can be powerful. But a Roth IRA is not magic, and it is not a hot-stock shortcut. It is a long-term account with contribution limits, income rules, withdrawal rules, and investment risk. The goal is simple: give your future self more choices.

What is a Roth IRA?

A Roth IRA is an individual retirement arrangement, commonly called an individual retirement account, that you open outside your employer. You contribute after-tax dollars, then choose investments inside the account, such as ETFs, stocks, bonds, mutual funds, or cash-like options depending on what your provider offers.

Here’s the core trade-off:

• You do not get a federal tax deduction for Roth IRA contributions.

• Your money can be invested for the long term.

• Qualified withdrawals of earnings are federally tax-free if you meet IRS rules.

• You can generally withdraw your direct contributions at any time without federal income tax or the 10% early withdrawal penalty.

Unlike a workplace 401(k), a Roth IRA is not tied to your job. If you change employers, switch careers, or take time away from paid work, the Roth IRA can stay with you.

This article is general education, not personalized tax or investment advice. Stash is a regulated investment adviser, not a bank, and we do not push specific securities.

Roth IRA rules for 2026

The IRS updates some retirement account numbers over time. For tax year 2026, the IRA contribution limit is $7,000, or $8,000 if you’re age 50 or older. That limit applies to your traditional IRA and Roth IRA contributions combined.

For 2026, direct Roth IRA contribution eligibility phases out at these modified adjusted gross income, or MAGI, ranges:

If your income is below the phaseout range, you may be able to make the full contribution. If your income falls inside the range, your allowed contribution is reduced. If your income is above the range, you cannot contribute directly to a Roth IRA for that year.

A few rules matter:

• You need earned income, such as wages, salary, tips, commissions, or self-employment income.

• You cannot contribute more than your earned income for the year.

• The IRA limit is shared across Roth and traditional IRAs.

• 401(k) contributions do not count against your IRA limit.

• The 2026 contribution deadline is generally the 2026 tax filing deadline in April 2027, not including extensions.

Example: if the 2026 IRA limit is $7,000 and you put $4,000 into a traditional IRA, you can contribute up to $3,000 to a Roth IRA if you’re otherwise eligible.

How a Roth IRA works

Think of a Roth IRA like a container with special tax rules. The container is the Roth IRA. The investments are what you put inside it.

Opening the account is only step one. If the money sits in uninvested cash, it may not have much chance to outpace inflation. If you invest it, the balance can rise or fall based on the investments you choose, market conditions, time, and fees.

Here’s a plain-English example.

Maya is 30 and earns $92,000 a year. She already contributes to a workplace 401(k) and wants another retirement bucket. She opens a Roth IRA and contributes $300 a month.

That’s $3,600 a year. Over 10 years, she contributes $36,000. She does not deduct those contributions on her tax return. But if she keeps the account long enough and follows the qualified distribution rules, her investment earnings may be withdrawn federally tax-free in retirement.

There is no promised result. A diversified portfolio can still lose value, especially over short periods. But long-term investing gives compounding more time to work. That is the point of a Roth IRA: not guessing what will pop next week, but building a portfolio your future self can use.

Roth IRA contribution rules

Roth IRA contribution rules answer three questions: do you have earned income, how much did you make, and how much have you already contributed to IRAs this year?

You need earned income

Earned income usually includes wages, salary, tips, taxable alimony, commissions, and net self-employment income. Investment income, pension income, Social Security benefits, and rental income usually do not count as earned income for IRA contribution purposes.

Your income may limit direct contributions

Roth IRA income eligibility is based on MAGI, which can differ from the income number you think of day to day. If your income is near the phaseout range, use the IRS worksheet or talk with a tax professional before contributing.

Spouses may be able to contribute too

If you’re married filing jointly and one spouse has little or no earned income, a spousal IRA may allow contributions for that spouse as long as the couple has enough taxable compensation and meets the other rules. A spousal Roth IRA is not a joint account. It belongs to the spouse whose name is on it.

Kids and teens can use Roth IRAs if they have earned income

There is no minimum age for a Roth IRA. A minor with earned income may be able to contribute, often through a custodial Roth IRA. The contribution still cannot exceed the child’s earned income for the year or the annual IRA limit, whichever is lower.

Roth IRA withdrawal rules

Roth IRAs are more flexible than many retirement accounts, but flexibility is not the same as a blank check.

The IRS generally treats Roth IRA withdrawals in this order:

1. Your direct contributions

2. Conversions and rollovers

3. Earnings

That order matters because direct contributions are usually the easiest money to access. Since you already paid taxes on contributions, you can generally withdraw them at any time without federal income tax or the 10% early withdrawal penalty.

Earnings are different. To withdraw earnings as a qualified distribution, you generally must meet both tests:

• Your first Roth IRA contribution was made at least five tax years ago.

• You are age 59½ or meet another qualifying condition, such as disability, death, or a first-time home purchase exception.

The first-time home purchase exception has a lifetime limit of $10,000 for earnings. It also has specific IRS requirements.

If you withdraw earnings too early, they may be subject to income tax and a 10% additional tax unless an exception applies. Conversions can also have their own five-year penalty clocks. This is one of those places where tax rules get sharp fast, so professional tax help can be worth it.

The Roth IRA 5-year rule, explained

The Roth IRA 5-year rule is easy to hear and easy to misunderstand.

For qualified withdrawals of earnings, the clock generally starts on January 1 of the tax year for your first Roth IRA contribution. If you make your first Roth IRA contribution for tax year 2026 before the April 2027 deadline, your five-year clock is treated as starting January 1, 2026.

Example: Jordan opens and funds a Roth IRA for the first time in March 2027, designating the contribution for tax year 2026. Jordan’s 5-year clock starts January 1, 2026. That does not mean all withdrawals are automatically tax-free after five years. Jordan also generally needs to be 59½ or meet another qualifying condition for earnings to come out as a qualified distribution.

A simple way to remember it: contributions are your already-taxed money. Earnings get the special Roth tax treatment only after the IRS rules are satisfied.

Roth IRA vs. traditional IRA

Roth and traditional IRAs are both retirement accounts, but they flip the tax timing.

A Roth IRA may appeal to someone who expects their tax rate to be higher later or who wants a tax-free retirement bucket. A traditional IRA may appeal to someone who values a deduction now. Nobody can know future tax law with certainty, so tax diversification can be useful.

Roth IRA vs. 401(k)

A Roth IRA and 401(k) can both help with retirement, but they are built differently.

A 401(k) is an employer plan. It may offer an employer match, higher contribution limits, automatic payroll deductions, and a limited menu of investments. If your employer offers a match, that can be a valuable benefit to consider.

A Roth IRA is an individual account. It usually gives you more control over where you open it and what investments are available, but the contribution limit is much lower and income limits apply to direct Roth IRA contributions.

Many people use both. A common approach is to think in layers: workplace match, high-interest debt, emergency savings, then additional retirement contributions based on budget and goals. The exact order depends on your situation.

Why a Roth IRA matters for everyday investors

The investing industry loves making retirement sound complicated. That keeps too many people stuck, waiting until they feel like experts. You do not need to be an expert to start understanding the rules.

A Roth IRA can help in three practical ways.

First, it adds tax diversity. If most of your retirement savings are in a traditional 401(k), future withdrawals may be taxable. A Roth IRA can create another bucket with different tax treatment.

Second, it can reward time. The earlier money is invested, the more time it has to ride through market cycles. That does not remove risk, but it gives long-term investing room to work.

Third, it gives you ownership. A Roth IRA follows you across jobs. Your retirement plan should not depend entirely on one employer’s benefits menu.

Stash’s view is simple: long-term investing should not be reserved for people who already speak the language of finance. Guidance should be accessible, understandable, and built into the tools people actually use. A Roth IRA is one piece of that bigger picture.

Common Roth IRA mistakes to avoid

Mistake 1: Opening a Roth IRA and not investing the money

A Roth IRA is the account. It does not automatically mean your cash is invested. If you want market exposure, you have to choose investments or use a managed portfolio option if your provider offers one.

Mistake 2: Contributing when your income is too high

If you contribute more than you’re allowed, you may face a 6% excise tax each year the excess remains in the account. If your income is near or above the Roth IRA phaseout range, check the rules before contributing.

Mistake 3: Forgetting the combined IRA limit

The annual IRA limit is not per account. It is shared across your Roth and traditional IRAs. Multiple accounts do not create extra contribution room.

Mistake 4: Treating a Roth IRA like everyday spending money

Yes, direct contributions are generally accessible. But a Roth IRA is designed for retirement. Pulling money out repeatedly can interrupt compounding and make it harder to build your portfolio over time.

Mistake 5: Chasing hype inside a tax-advantaged account

A Roth IRA’s tax benefits do not protect you from bad investing behavior. Concentrated bets, day-trading, and trend chasing can still hurt. The Stash approach is to invest for the long term, diversify, and invest consistently when your budget allows.

Bottom line

A Roth IRA can be a strong retirement tool because it combines after-tax contributions, potential tax-free qualified withdrawals, and long-term investing. The fine print matters: contribution limits, income eligibility, the 5-year rule, fees, and investment risk all shape how useful the account may be for you.

You do not have to decode retirement accounts from scratch. Start with the rules. Build your portfolio with a long-term mindset. Get guidance when you need it.

Important disclosures

• Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

• Stash does not provide tax or legal guidance. Consult a qualified tax or legal professional about your own circumstances.

• This material is for informational and educational purposes only and does not constitute investment, legal, accounting, or tax advice. The information reflects market conditions as of publication and may change without notice. Stash makes no guarantees regarding accuracy or future performance. Investing involves risk, including possible loss of principal. Examples are for illustrative purposes only and not recommendations to buy or sell any security or strategy. Past performance does not guarantee future results. For full disclosures, visit www.stash.com/disclosures.