3 min

When Do You Pay Taxes on a Roth IRA?

Sep 12, 2022
in a nutshell
  • You get the tax break on the back end of the investment—when you withdraw from the Roth IRA.
  • Since you pay taxes upfront on the money you put into a Roth IRA, all the returns your investment earns over the years are tax free.
  • Once you reach age 59 ½, and have had the account open for at least five years, you can withdraw any amount without incurring a tax liability.
Image of With a Roth IRA, you can save aggressively for retirement and benefit from tax savings since the funds you contribute are allowed to grow tax free.
in a nutshell
  • You get the tax break on the back end of the investment—when you withdraw from the Roth IRA.
  • Since you pay taxes upfront on the money you put into a Roth IRA, all the returns your investment earns over the years are tax free.
  • Once you reach age 59 ½, and have had the account open for at least five years, you can withdraw any amount without incurring a tax liability.

With a Roth IRA, you can save aggressively for retirement and benefit from tax savings. That’s because the funds you contribute to a Roth IRA are allowed to grow tax-free. So, when you make withdrawals in retirement, you won’t have to pay taxes on the returns you’ve earned over the years.

Your Roth IRA can hold a variety of types of assets, including stocks, bonds and mutual funds. Say you contribute $5,000 to a Roth IRA each year starting at age 35. By the time you reach age 65, you will have contributed $150,000. Assuming a 7 percent rate of return, your Roth IRA account balance will be about $510,365. That’s $360,365 in earnings you can use in retirement without ever having to pay taxes on it.

So when am I taxed on the Roth IRA?

Contributions to a Roth IRA are made “after-tax,” meaning you’ve already paid taxes on the income before you deposit it into your Roth account. So you don’t get a tax break on that money in the year that you made it. In the example above, you would have paid taxes on that $5,000 you contributed each year for 30 years before you put it into the Roth IRA. 

Instead, you get the tax break on the back end of the investment—when you withdraw from the Roth IRA. Because you pay taxes upfront on the money you put into a Roth IRA, all the returns your investment earns over the years are tax-free. Once you reach age 59 ½, and have had the account open for at least five years, you can withdraw any amount from your Roth IRA at any time without incurring a tax liability.

Can anyone contribute to a Roth IRA?

No, you have to meet certain income qualifications to open and contribute to a Roth IRA, according to the IRS. In 2020, individuals earning up to $124,000 can contribute up to the full limit of $6,000 (or $7,000 for people age 50 and older) to a Roth IRA. 

Individuals who earn more than $124,000 and less than $139,000 can contribute a reduced amount. Married couples who file taxes jointly can contribute to a Roth IRA if they earn less than $196,000, or a reduced amount for those earning more than $196,000 and less than $206,000. 

When can I withdraw money from a Roth IRA?

You can take the money you’ve contributed out of your Roth IRA at any time and for any reason. Because you’ve already paid taxes on it, the IRS does not place restrictions on when you can withdraw your contributions.

If you want to withdraw more than you’ve contributed, you’ll be withdrawing some of your earnings—and that’s different. To withdraw earnings tax-free, you must have owned the IRA for more than five years and you must have reached age 59 ½. There are a few exceptions for cases like using the money for a first-time home purchase or if you have a permanent disability. If you are younger than 59 ½ and you don’t meet certain requirements, you’ll have to pay income taxes and an early withdrawal penalty of 10 percent. 

Even if you are older than 59 ½, but you have owned the Roth IRA account for less than five years, you will be on the hook to pay taxes on your account’s earnings. You can withdraw your contributions tax-free and you won’t have to pay a penalty, but the growth on your Roth IRA will be taxed at your regular income tax rate. 

One of the attractive qualities of a Roth IRA is the ability to withdraw your contributions at any time without paying taxes. However, a Roth IRA is intended to be a retirement savings vehicle, with the huge benefit of tax-free growth. That growth will continue as long as you leave your contributions untouched (and continue contributing regularly). If you withdraw the savings before you reach retirement age, you’re losing the value of saving for retirement. (Acorns offers Roth and other types of IRAs. Learn more.)

Are withdrawals required after a certain age?

No, there are no required distributions from your Roth IRA. Because you’ve already paid taxes on the money that you contribute to a Roth IRA, the government has already received its portion. So the IRS doesn’t care if you never make withdrawals from the account; that’s entirely up to you.

With a traditional IRA, you’re required to start taking minimum distributions when you reach age 72. That’s because the IRS wants to start getting the taxes for that income. But with a Roth, there’s no such requirement. If you don’t need the money, you can leave it alone and let it continue to grow, tax-free, as long as you want. (However, if you leave your Roth IRA to an heir or otherwise transfer ownership, the new owner may be required to take required minimum distributions.)

The tax advantages are some of the greatest benefits offered by a Roth IRA. By contributing post-tax dollars to your Roth IRA, you’re setting yourself up for tax-free income in retirement. 

This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.

Nancy Mann Jackson

Nancy Mann Jackson is an award-winning journalist who specializes in writing about personal finance, real estate, business and other topics. 

Acorns Logo
Acorns
Over 11 million sign ups
Get started Get the app