Roth IRA Taxes: How They Work and When You Pay

There are many different types of retirement plans, and one of the main ways to choose among them is to ask, "How do they treat you at tax time?"

When it comes to the Roth IRA, it's all about delayed gratification. While you won't get a tax deduction for making contributions, you get to take the investment earnings out tax-free in retirement.

Roth IRA taxes

With the Roth IRA, the money you contribute isn't tax-deductible. That means you don't report Roth IRA contributions on your tax return, and you can't deduct them from your taxable income. Instead, you pay taxes on the money before you put it into the account, and your investment grows tax-free. You can then withdraw those contributions at any time tax-free.

In 2024, if you're eligible to contribute to a Roth IRA, you can put $7,000 into an account if you're under 50. If you're 50 or older, you can contribute $8,000. 

» Learn more about Roth IRA income and contribution limits

Roth IRA taxes on earnings

While you can withdraw your Roth IRA contributions at any time without tax or penalty, earnings are a different story. Even though your earnings grow tax-free as long as they stay in the Roth IRA, you have to abide by the Roth IRA withdrawal rules when it comes to cashing them out.

To withdraw your investment earnings without paying taxes on them, you need to have had the account open for at least five years and be at least age 59 ½. Otherwise, you'll face a fairly steep 10% penalty, plus income tax, on what you withdraw (though there are some exceptions).

» Learn more about the Roth IRA five-year rule

Roth IRA taxes on withdrawals

Qualified Roth IRA withdrawals in retirement (meaning you followed the withdrawal rules) are not subject to income tax. That's because your contributions were made with money you’ve already paid taxes on, and your earnings have stayed in your account long enough^[0]

» Shop around See our picks for the best Roth IRA providers

Roth IRA taxes vs. traditional IRA taxes

The main difference between how Roth IRAs and traditional IRAs are taxed is when you pay the taxes.

With a traditional IRA, you put your money in the account before you pay taxes on it. Putting in pre-tax money helps to reduce your taxable income in the year you make the contribution, which is a valuable benefit because it can help lower your tax bill.

In other words, you might get a tax deduction for putting money into a traditional IRA, reducing your taxable income by the amount of the contribution. When you go to take the money out in retirement, that's when it's subject to income taxes.

With a Roth IRA, you pay taxes on the money first, then put it into the account. Because you paid taxes before you put the money into your investment account, when you go to make a qualified withdrawal, there are no income taxes to pay.

Still, there are at least a couple of situations where a traditional IRA might be a better bet for you than a Roth IRA:

• If your income is too high to open a Roth IRA, but you qualify for a tax deduction for contributing to a traditional IRA, then the traditional might be the way to go. In 2024, you are not eligible to contribute to a Roth IRA if you have a modified adjusted gross income of $240,000 or more for those married filing jointly, or $161,000 for single filers. (Another option if you don't qualify for a Roth IRA is a backdoor Roth IRA.)

• If you’re pretty sure your tax bracket is going to be lower in retirement than it is right now, then it makes sense to pick a traditional IRA and delay paying taxes until retirement.