What Is a Roth IRA and Why Is It Tax-Advantaged?
A Roth IRA is a type of retirement account funded with money on which you’ve already paid income tax. Unlike some other retirement accounts, contributions are not deductible when made. Instead, the primary benefit occurs later.
If the applicable rules are met, qualified withdrawals are not subject to income tax, including both the original contributions and all investment growth. Unlike a Traditional IRA, there is no upfront tax deduction when contributing, but in exchange, withdrawals in retirement are generally excluded from taxable income.
This trade-off, paying income tax upfront in exchange for non-taxable withdrawals later, is why Roth IRAs are often especially attractive to younger taxpayers or to individuals who expect to be in a higher tax bracket in the future.
How Much Can You Contribute?
Roth IRA contributions are subject to annual limits. For 2025, the maximum contribution is $7,000 for individuals under 50 and $8,000 for those age 50 or older (in 2026 these contributions increase to $7,500 and $8,600, respectively). These limits apply in total across all IRA accounts combined per individual, not on a per-account basis.
To be eligible to contribute, you must have earned income, such as wages or self-employment income. Investment income alone does not qualify, and contributions may not exceed the amount of earned income received during the year. However, a spousal IRA is an exception, if you are married filing jointly, a non-working or lower-earning spouse may still contribute to an IRA based on the working spouse’s earned income, as long as the couple has enough combined earned income to cover both contributions.
Roth IRA contributions are also subject to income limits.For single filers and heads of household, the phase-out begins at $153,000 and ends at $168,000. For married couples filing jointly, the phase-out begins at $242,000 and ends at $252,000. These thresholds are indexed for inflation and adjusted periodically.
Can You Open a Roth IRA for a Child?
It is possible to fund a Roth IRA for a child, but only if the child has earned income. This could come from things like babysitting, acting or modeling, or legitimate wages paid from a family business, provided the pay is reasonable and properly documented. The contribution limit is the lesser of the child’s earned income or the annual Roth IRA limit.
While parents may provide the funds as a gift, the contribution must be supported by the child’s earned income, and the account is owned by the child, not the contributor.
How Can You Take Distributions From a Roth IRA?
When you withdraw money from a Roth IRA, the rules vary depending on what you take out. Your original contributions can be withdrawn at any time without income tax or penalty, while earnings are subject to additional requirements.
For earnings to be withdrawn without being subject to income tax, the account must have been open for at least 5 years and the account owner must be at least age 59½ or meet another qualifying condition.
When both requirements are satisfied, the distribution is considered qualified and is not included in taxable income.
Early Distribution Exceptions
If earnings are withdrawn before age 59½, there are certain exceptions that can eliminate the 10% early-withdrawal penalty, although the earnings may still be taxable. Common exceptions include first-time home purchases up to $10,000, qualified higher education expenses, disability, death, qualified birth or adoption expenses, and certain substantially equal periodic payment arrangements.
Even when the penalty is waived, the 5-year rule still applies to earnings, which means income tax may still be due if the account hasn’t met the required holding period.
The Roth IRA Distribution “Ordering Rules”
One of the most important technical rules for Roth IRAs is the order in which distributions are treated. The IRS assumes withdrawals come first from contributions, then from converted amounts, and finally from earnings. This ordering rule is what allows many Roth IRA owners to access contributions early without tax or penalty, while preserving the account’s ability to grow without future income tax on qualified withdrawals.
Backdoor Roth IRA
For high-income taxpayers who are not eligible to contribute directly to a Roth IRA, a strategy known as a Backdoor Roth may be available. This involves making a non-deductible contribution to a Traditional IRA and then converting that amount into a Roth IRA. While this strategy is legal, it comes with an important caveat known as the pro-rata rule. If the taxpayer has other pre-tax IRA balances, such as Traditional, SEP, or SIMPLE IRAs, part of the conversion will be taxable.
The best candidates for a Backdoor Roth are taxpayers who have no other pre-tax IRA assets, or who can roll those assets into an employer-sponsored retirement plan such as a 401(k), since employer plans are not included in the pro-rata rule. Participation in or maxing out a 401(k) does not limit the ability to make a nondeductible IRA contribution or complete a Backdoor Roth conversion.
What Happens When a Roth IRA Is Inherited?
When a Roth IRA is inherited, the tax treatment depends on the beneficiary.
A surviving spouse generally has the most flexibility and can treat the Roth IRA as their own, allowing continued growth that is not subject to income tax and no required minimum distributions during their lifetime.
Non-spouse beneficiaries, under current law, are generally required to fully distribute the account within 10 years. While distributions may be spread out during that period, the entire balance must be withdrawn by the end of the 10th year. If the Roth IRA has been open for at least 5 years, those inherited distributions are generally excluded from taxable income.
Certain Eligible Designated Beneficiaries (EDBs), such as minor children, disabled beneficiaries, or chronically ill individuals,may be subject to different distribution rules.
Aura Advisors’ Perspective
Overall, Roth IRAs are among the most flexible and powerful tools in tax and retirement planning. They allow investment growth that is not subject to income tax on qualified withdrawals, have no required minimum distributions during the owner’s lifetime, permit access to contributions without penalty, and provide meaningful advantages for estate planning.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.
For More Reading:
Unlocking the Power of the Mega Backdoor Roth Strategy
I’ve Inherited an IRA; Now What Do I Do?