Roth IRA Calculator

What is a Roth IRA and how does it work?

A Roth IRA is an individual retirement account funded with after-tax dollars. Unlike a traditional IRA or 401(k), you do not get an upfront tax deduction for your contributions. Instead, the IRS allows your money to grow completely tax-free, and qualified withdrawals in retirement are not taxed at all — including every dollar of investment growth your account has accumulated over the years.

This tax structure is the Roth IRA's defining feature. By paying tax now on a relatively small contribution, you avoid paying tax later on what could be a much larger withdrawal. For a saver with decades of compounding ahead, the long-term value of tax-free growth typically outweighs the short-term cost of skipping the upfront deduction.

You can hold virtually any investment inside a Roth IRA — index funds, individual stocks, ETFs, bonds and more. Most investors use a low-cost broad-market fund and let compounding do the work. As long as your withdrawal qualifies, neither your original contributions nor your investment gains will ever face federal income tax again.

Roth IRA contribution limits for 2025

For 2025, the IRS lets you contribute up to $7,000 per year to a Roth IRA, or $8,000 if you are age 50 or older thanks to the catch-up provision. This limit is the combined total across all your traditional and Roth IRA accounts — opening multiple Roth IRAs does not increase the cap.

Contributions are also subject to income phase-outs. In 2025, single filers with modified adjusted gross income above roughly $165,000 see their allowed contribution shrink, with the cutoff around $165,000–$180,000 depending on the IRS's annual adjustment. Married couples filing jointly face a similar phase-out at higher income levels. High earners can still contribute through a "backdoor Roth" strategy, but it requires careful tax planning.

If you are eligible, contributing the maximum every year is one of the simplest and most powerful long-term wealth-building moves available. Even partial contributions add up significantly over a 30- or 40-year career, especially given the tax-free withdrawals at the end.

The five-year rule explained

The Roth IRA's five-year rule is one of the most misunderstood parts of the account. To withdraw earnings completely tax-free, your first Roth IRA contribution must have been made at least five tax years ago AND you must be at least 59½ years old. The clock starts on January 1 of the year of your first contribution, regardless of when during that year you contributed.

You can always withdraw your direct contributions (not earnings) at any time, for any reason, without tax or penalty — because you have already paid income tax on that money. This makes the Roth IRA unusually flexible compared to a 401(k), but you should still treat it as a long-term retirement account to capture the full benefit of tax-free compounding.

Roth IRA vs traditional IRA: which is right for you?

The choice between a Roth and a traditional IRA comes down to whether you want your tax break today or in retirement. With a traditional IRA, your contributions may be tax-deductible now, lowering your current taxable income, but every dollar you eventually withdraw is taxed as ordinary income. With a Roth IRA, you pay income tax upfront and receive tax-free withdrawals later.

The general rule of thumb: a Roth IRA wins if you expect to be in a similar or higher tax bracket in retirement. A traditional IRA wins if you expect a noticeably lower bracket later. Younger workers and those at the start of their career are often in lower brackets today than they will be later, which makes the Roth especially appealing for them.

Beyond the tax math, Roth IRAs have two practical advantages: no Required Minimum Distributions during the owner's lifetime, and tax-free inheritance for non-spouse beneficiaries (though they must withdraw the full balance within 10 years under current rules). For estate planning purposes, this makes the Roth one of the most flexible accounts available.

The power of tax-free compounding

The real magic of the Roth IRA is decades of tax-free compounding. Imagine contributing $7,000 per year from age 25 to 65 and earning a 7% annual return. By retirement, you would have contributed $280,000 of your own money, but your Roth IRA balance would exceed $1.5 million — and not a single dollar of withdrawals would be taxed.

Compare this to a taxable investment account where you would owe capital gains tax on any sale, and the difference becomes striking. The Roth IRA shelters your gains from taxation entirely, which means more of your money stays invested and continues compounding year after year. The earlier you start, the more time you give compounding to work in your favor.

How to maximize your Roth IRA

Start by contributing the maximum allowed every year — even if you cannot hit the full $7,000, contribute consistently. Set up automatic monthly transfers so you never have to think about it. Invest the cash rather than letting it sit idle; many savers correctly fund their Roth IRA but forget to actually buy investments inside it.

For most long-term investors, a low-cost total-market or S&P 500 index fund is a sensible default. As you approach retirement, you may want to gradually shift toward a more conservative mix, but staying invested in equities for the bulk of your career is what unlocks the Roth's tax-free growth advantage.