What is a Roth IRA?
A Roth IRA is a type of Individual Retirement Arrangement (IRA) that provides tax-free growth and tax-free income in retirement. The major difference between Roth IRAs and traditional IRAs is that contributions to a Roth IRA are made using after-tax dollars. Because you pay taxes upfront, your contributions (not earnings) may be withdrawn tax-free at any time without penalty.
First introduced by the Taxpayer Relief Act of 1997 and named after Senator William Roth, Roth IRA accounts can be opened at many different institutions. From the largest financial companies to online-only investment platforms, all institutions are regulated by the IRS but offer varying perks, mutual funds, and software tools.
How to Use This Calculator
This calculator estimates the balances of your Roth IRA savings and compares them directly against a regular taxable account to showcase the power of tax-free growth. It is primarily intended for US residents.
- Current Balance: The total amount you currently have invested in your retirement account.
- Maximize Contributions: Toggle "Yes" to automatically apply the maximum annual IRS contribution limits based on your age ($7,500 for age < 50, and $8,600 for age 50 and above in 2026).
- Annual Contribution: The amount you plan to add to the account every year.
- Expected Rate of Return: Your estimated annual interest or growth rate (e.g., 6% to 8% based on historical market averages).
- Marginal Tax Rate: The tax bracket applied to your traditional taxable account earnings to showcase the difference in growth.
The Formula / The Method
The core advantage of a Roth IRA is that investments grow free of annual taxes. In a standard taxable account, you owe taxes on your capital gains and dividends every year, which creates a "tax drag" on your compounding interest.
Balance = (Previous Balance + Contribution) × (1 + Rate of Return)
Taxable Account Growth Formula:
Net Return Rate = Rate of Return × (1 - Marginal Tax Rate)
Balance = (Previous Balance + Contribution) × (1 + Net Return Rate)
Converting Traditional IRAs into Roth IRAs
The IRS allows people to convert a traditional IRA into a Roth IRA. This is commonly referred to as a "backdoor Roth IRA" and is particularly useful for high-income earners who cannot directly contribute to a Roth IRA due to income limits. There are no income limits regarding conversions.
There are three common conversion methods:
- Same Trustees: The easiest method is to transfer funds from a traditional to a Roth IRA within the same financial institution.
- Different Trustees: Request the receiving institution to handle the transfer from your current institution. Stock certificates or checks can be sent to credit the assets to the new IRA account.
- 60-day Rollover: Directly withdraw funds from a traditional IRA by check and roll it into a Roth IRA within 60 days. If not completed within 60 days, the distribution will be taxable and subject to a 10% early distribution penalty.
Before making a conversion, ensure there are sufficient funds outside of the IRA to pay the income tax on the conversion, and keep in mind that the account must mature at least five years to avoid taxation on earnings.
Frequently Asked Questions
No, contributions to a Roth IRA are made with after-tax dollars, meaning they are not tax-deductible. However, there is a tax credit, the Saver's Tax Credit on IRS Form 8880, that eligible taxpayers can claim for up to 50% on the first $2,000 in contributions.
Because you have already paid taxes on the money you contribute, your direct contributions can be withdrawn tax-free and penalty-free at any time. However, earnings on those contributions are subject to taxes and/or penalties if withdrawn before the account holder is 59½ years old or if the account is less than five years old.
People with incomes above certain thresholds cannot qualify to make direct Roth IRA contributions. For example, for the 2026 tax year, the phase-out limit starts at an adjusted gross income of $168,000 for single filers, and $252,000 for married couples filing jointly.
No. There are no Required Minimum Distributions (RMDs) for Roth IRAs during the lifetime of the original owner. Roth IRAs are the only tax-sheltered retirement plans that do not impose RMDs, making them excellent vehicles for wealth transfer to heirs.
For parents, an advantage of the Roth IRA is that funds held inside the account are not reported as assets on the Free Application for Federal Student Aid (FAFSA). However, if you withdraw funds to pay for college, that distribution will count as income on the following year's FAFSA.