Roth IRAs: The Basics

When it comes to saving for retirement, one of the most common questions people ask is whether they should contribute to a Roth IRA. When used in the right circumstances, Roth IRAs can be one of the most powerful tax-efficient retirement savings tools available. Understanding how they work, including their benefits and limitations, can help you determine whether they’re a good fit for your financial plan.

What is a Roth IRA?

A Roth IRA is a tax-advantaged retirement account funded with after-tax dollars. Its biggest advantage is that qualified withdrawals in retirement are completely tax-free. Unlike a Roth 401(k) or 403(b), which are offered through an employer, a Roth IRA is opened and funded by an individual. The long-term benefits can be particularly meaningful if your investments have many years to grow or if you expect to be in a higher tax bracket during retirement.

Roth vs. Traditional 

The primary difference between Roth and traditional retirement accounts is when you pay taxes.

Traditional retirement accounts, such as Traditional IRAs, 401(k)s, and 403(b)s, generally provide a tax deduction today. Contributions reduce your taxable income, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income.

• For example, if you contribute $5,000 to a traditional retirement account, that $5,000 is generally excluded from your taxable income for the year. However, every dollar withdrawn in retirement (including investment growth) is typically subject to income tax. 

As mentioned earlier, with a Roth account, the tax treatment is reversed. Contributions are made with after-tax dollars, so there is no upfront tax deduction. However, qualified withdrawals (including all investment growth) are completely tax-free.

• In the same example, if $5,000 is contributed to a Roth account, it is not excluded from taxable income. However, if that $5,000 earns 8% per year and grows to $50,313 over 30 years, the entire $50,313 can be withdrawn tax-free, if qualified. 
• It is important to note that the Roth IRA is an account structure, not the investment. The investment you own inside the Roth IRA (stocks, bonds, CD’s mutual funds) will ultimately determine your rate of return over time.

This example assumes an 8% annual rate of return with no withdrawals during the 30-year period. It is provided solely to illustrate the power of tax-free compounding and is not a projection of any particular investment strategy offered by Legacy Financial Strategies.

Which is right for me?

There is no universal answer to which option is “better.” 

Traditional contributions may make sense if you:

• Are currently in a high tax bracket
• Are nearing retirement
• Expect to be in a lower tax bracket during retirement
• Want to decrease your taxable income this year

Roth contributions may be more attractive if you:

• Are at least 10 years away from retirement (or from needing access to the funds)
• Are currently in a lower tax bracket
• Expect your income to increase significantly over time
• Believe tax rates may rise
• Want greater flexibility in retirement

For many retirees, having both traditional (pre-tax) and Roth assets can provide an advantage. By maintaining money in multiple “tax buckets,” you gain the flexibility to decide which accounts to withdraw from each year based on income needs, tax situation, and planning opportunities.

Roth IRA Contribution Limits

Roth IRA contributions for a tax year can be made until the tax filing deadline of the following year, typically April 15th. If eligible*, you may contribute up to:

• Under age 50: $7,500 for tax year 2026
• Age 50 and older: $8,600 for tax year 2026
• Note that if your earned income is lower than these limits, your maximum contribution is limited to your earned income in that tax year.

*IRS income limits determine whether you’re eligible to make the full Roth IRA contribution. For 2026, the limits are:

• Single: Modified Adjusted Gross Income (MAGI) below $153,000
• Married Filing Jointly: MAGI below $242,000

If your income exceeds these limits, you may still have other Roth savings options, including:

• Contributing to a Roth 401k or Roth 403b

• • Many employer-sponsored retirement plans offer a Roth contribution option. Unlike Roth IRAs, these plans do not have income limits for Roth contributions, and annual contribution limits are significantly higher.

• 2026 limits: 

• • Under age 50: $24,500 
  • Age 50 and older: $32,500 
  • Ages 60-63: $35,750

• Backdoor Roth IRA Contributions and Roth Conversions
• These are some creative ways to get around the income limits that apply to Roth IRA contributions while working within the rules. Read more about them in our blog, “Roth Conversions: A Smart Strategy for Tax-Free Income in Retirement”.

Roth IRA Withdrawals

You can withdraw your original contributions (your cost basis) at any time without taxes or penalties.

Investment earnings, however, are only tax-free if the withdrawal is considered qualified, meaning the Roth IRA has been open (and funded) for at least five years and one of the following applies:

• You are age 59 ½ or older 
• You become disabled
• The funds are used for a qualified first-time home purchase (up to $10,000)
• The withdrawal is made due to your death

If you don’t meet these requirements, exceptions may still allow you to avoid the 10% early withdrawal penalty, depending on your circumstances.

Additional Roth IRA benefits include:

• Inherited Roth IRAs generally remain income tax-free for beneficiaries, provided the five-year rule has been satisfied.
• Roth IRAs are not subject to Required Minimum Distributions (RMDs) during the original owner’s lifetime.

The Bottom Line

Roth IRAs can be one of the most valuable tools for building tax-free retirement income, offering flexibility and the potential to reduce lifetime taxes while increasing confidence in retirement. 

Understanding how these accounts work can help you make more informed decisions and reduce taxes over your lifetime. The key is determining the optimal strategy for your unique situation. At Legacy, we routinely review all available options and recommend the strategies that best align with your financial goals.