Roth IRA Explained

A Roth IRA (Individual Retirement Arrangement) is a tax-advantaged account you open at a broker and fund with after-tax dollars. That phrase is the whole story: the money you put in has already had income tax taken out, so unlike a traditional IRA you do not get a deduction in the year you contribute. What you get in return is arguably better. Inside the account, your investments grow with no tax on dividends, interest, or capital gains, and qualified withdrawals in retirement are entirely tax-free.

The contrast with a traditional IRA is the cleanest way to understand it. A traditional IRA usually gives you a tax break today and taxes you on the way out; a Roth IRA skips the break today and gives you tax-free money on the way out. You are essentially choosing whether to pay tax on the seed or on the harvest. A Roth bets that paying tax on the smaller seed now is the better deal. Our traditional vs Roth IRA guide compares the two side by side.

For 2026, the IRS set the IRA contribution limit at $7,500, with an extra $1,100 catch-up contribution for people age 50 and older, for a total of $8,600. That limit applies to all your IRAs combined, Roth and traditional, not to each account separately. You also need earned income at least equal to what you contribute. These are 2026 figures and are adjusted over time, so verify the current numbers with the IRS before you contribute.

The ability to contribute to a Roth IRA phases out at higher incomes, based on modified adjusted gross income (MAGI). For 2026, single filers and heads of household phase out between $153,000 and $168,000; married couples filing jointly phase out between $242,000 and $252,000; and married filing separately phases out from $0 to $10,000. Below the bottom of your range you can contribute the full amount, inside the range you can contribute a reduced amount, and above the top you cannot contribute directly at all. Our Roth IRA contribution limits guide breaks down the 2026 numbers in detail; confirm them with the IRS.

The 5-year rule governs when the earnings in a Roth IRA can come out tax-free. To take a qualified distribution of earnings, you generally need two things at once: to be at least 59 and a half years old, and to have had a Roth IRA open for at least five tax years. The five-year clock starts on January 1 of the year you made your first Roth contribution, which means a contribution made in, say, early one year for the prior tax year can start the clock earlier than you would expect.

The rule applies only to earnings, not to the money you put in. It exists to stop people from using a Roth as a short-term tax dodge, and it runs once per person rather than per account, so opening a second Roth later does not restart the clock for your earnings. Roth conversions have their own separate five-year timing, which is worth understanding before converting. Verify how the rule applies to your situation with the IRS, since Walnut is not a tax advisor.

One of the quiet advantages of a Roth IRA is that it has no required minimum distributions, or RMDs, during the original owner's lifetime. A traditional IRA generally forces you to start withdrawing a minimum amount each year once you reach a set age (currently 73), whether you need the money or not, and those withdrawals are taxable. A Roth IRA imposes no such requirement on the original owner.

That difference compounds. Because you are never forced to withdraw, a Roth IRA can keep growing tax-free for as long as you live, which makes it useful both for late-in-life flexibility and for passing money to heirs. Inherited Roth IRAs do have their own distribution rules, so the no-RMD benefit is specific to the original owner. As always, confirm the current ages and rules with the IRS, since they change.

The single most useful thing to understand about Roth withdrawals is that contributions and earnings are treated very differently. Because you already paid tax on your contributions, you can withdraw that original money at any time, at any age, with no tax and no penalty. The IRS also treats withdrawals as coming out of contributions first, which is what gives a Roth its flexibility as a backstop.

Earnings are stricter. If you withdraw earnings before age 59 and a half or before the 5-year rule is satisfied, you generally owe ordinary income tax on them plus a 10% early-withdrawal penalty, with a handful of exceptions such as a first home purchase, certain education or medical costs, or disability. Once both the age and the five-year tests are met, earnings come out tax-free and penalty-free. Treat the early-withdrawal exceptions as something to verify with the IRS rather than assume.

A Roth IRA generally favors anyone who expects to be in a higher tax bracket in the future than they are in today. By paying tax at today's lower rate and pulling the money out tax-free later, they come out ahead. That describes a lot of younger savers, people early in their careers, and anyone in a temporarily low-income year, which is why a Roth is so often recommended for people just starting out.

The tax-free growth and lack of RMDs also make a Roth attractive to people who want flexibility, who expect tax rates to rise generally, or who want to leave tax-free money to heirs. The flip side is that someone in their peak earning years who expects a much lower bracket in retirement may prefer the up-front deduction of a traditional account. There is no universal answer; it depends on your tax picture now versus later. Walnut is informational and is not a financial or tax advisor, so treat this as background, not a recommendation.

If your income is above the phase-out ranges, you cannot contribute to a Roth IRA directly, but a strategy called the backdoor Roth is a legal workaround. The mechanics: you make a nondeductible contribution to a traditional IRA, which has no income limit, and then convert that money to a Roth IRA. Conversions are not subject to the income limits, so the end result is money inside a Roth even though a direct contribution was off-limits.

The catch is the pro-rata rule, which can make the conversion partly taxable if you hold other pre-tax IRA money, plus the separate five-year clock that applies to conversions. Done carefully it is a well-established path for high earners, but it has enough moving parts that it is worth confirming with the IRS or a tax professional. Our backdoor Roth explained guide walks through the steps and the pitfalls.

The table is a quick contrast, not a decision. The core question is whether you would rather take the tax break now (traditional) or take tax-free money later (Roth), which comes down to your current bracket versus your expected future one. Figures and ages are 2026 values and change over time; verify the current details with the IRS. For the fuller comparison, see our traditional vs Roth IRA guide.

A Roth IRA is a wrapper, not an investment. Once you have opened and funded one, you still have to decide what to hold inside it, and then keep an eye on how those holdings are doing. The useful questions are the same ones that matter in any account: how concentrated am I, how diversified is this mix, and how is each position performing. The tax-free nature of a Roth does not change those questions, it just raises the stakes of getting the long-run investments right.

That is where Walnut fits. It connects your existing brokerage, including a Roth IRA, through SnapTrade, and lets you ask in plain language through Claude, ChatGPT, or a built-in assistant how the investments inside your Roth are doing, where they overlap, and how each holding is tracking against the S&P 500. It is read-only by default until you choose to trade. Walnut is informational and is not a financial or tax advisor; it helps you see and act on your own account rather than telling you what to buy or how to handle your taxes.

A Roth IRA is a retirement account funded with after-tax dollars, so qualified withdrawals and all the growth come out tax-free. For 2026 you can contribute $7,500, or $8,600 if you are 50 or older, with the ability to contribute phasing out at higher incomes. Earnings are tax-free once you are 59 and a half and have met the 5-year rule, there are no required minimum distributions during your lifetime, and your own contributions can always come out without tax or penalty. It tends to benefit those who expect a higher future tax bracket, and high earners above the limits can use a backdoor Roth.

Open the account, fund it within the 2026 limits, choose long-term investments to hold inside it, and let the tax-free growth compound. From a connected account you can dig into any holding as an ETF, look at an individual stock, or explore a theme you want exposure to. Limits, income ranges, and ages change over time, and Walnut is not a tax advisor; verify every figure here with the IRS before acting.