Here’s why a Roth retirement account is a great gift to your future self

When I first learned about Roth IRAs and Roth 401(k) plans—the tax-advantaged retirement plans that are funded with a taxpayer’s after-tax income—I remember thinking that it must be nice to have enough income that you could afford to contribute money to your retirement without an immediate tax break.

But even though you fund Roth accounts with after-tax dollars, making them more expensive on the contribution side, they are ultimately a savvy way to save money in the long run. Unfortunately, if you don’t know what these accounts are or how they work, you will miss out on all of their benefits.

Here’s everything you need to know to make the most of Roth retirement accounts in your financial plan.

History of the Roth

In 1997, Congress introduced a new non-deductible IRA via the Taxpayer Relief Act. Named for Delaware Senator William V. Roth (and not, as I originally believed, for Van Halen frontman David Lee Roth), these accounts were designed to give you a tax break in retirement, rather than when you make contributions.

Although Roth accounts were originally restricted to IRAs, Roth 401(k) plans became available through workplace retirement accounts as of January 1, 2006. As of 2023, 93% of workplace retirement plans offered a Roth 401(k) option, according to the Plan Sponsor Council of America’s annual poll published in December 2024.

Roth account rules and limits

There are some important rules surrounding these accounts—the kind of rules that can put you on the IRS’s naughty list. Specifically, there are specific income and contribution limits for Roth IRA and Roth 401(k) plans that you must not exceed. These limits can and do change from year to year. The current 2025 limits are listed in the table below.

One thing to remember is that these yearly contribution limits encompass all IRAs or 401(k)s you may own. For instance, if you have a traditional IRA and a Roth IRA, you can’t send $7,000 to each one. (Not without waking Spike, the IRS enforcement officer who sleeps in the sub-basement). You will have to split your contributions between your traditional and Roth IRA so that your total contribution does not exceed $7,000.

This is the same for your traditional versus Roth 401(k) contributions. Altogether, they cannot exceed the annual contribution limit set by the IRS.

What the Roth has to offer

Introducing the Roth retirement account can feel a little like when your friend busts out a board game with 178 pages of instructions while insisting “it’s a little slow to get started, but it’s so worth it!”

However, despite the seeming complexity of Roth accounts, there are three main benefits to these retirement vehicles:

1. Like traditional IRAs and 401(k) plans, your Roth contributions grow tax-free.

2. Unlike traditional IRAs and 401(k) plans, any Roth withdrawals you make in retirement are 100% tax-free, provided you wait to take these distributions until after reaching age 59½ or after having held the account for at least five years, whichever comes last. You will pay the IRS a 10% penalty if you take an early withdrawal—but you won’t owe taxes.

3. Also unlike traditional IRAs and 401(k) plans, there are no required minimum distributions once you reach age 73. You can keep your money in a Roth account forever if you want and take distributions of any amount at any time, as long as you’re older than 59½ and have held the account for at least five years.

In other words, with a Roth account, for the low price of paying current income taxes, you get tax-free growth, tax-free withdrawals, and no required minimum distributions.

Ripping off the tax Band-Aid

Another way to look at a Roth account is to think of it as a way of paying taxes on your terms. Many young professionals are earning much less now than they will later in their career—and possibly less than they will be living on in retirement. Funding a Roth retirement plan now, while you are in a lower tax bracket, will save money later, once you have started earning a much higher income.

Additionally, by putting posttax dollars aside in a Roth account today, it gives you a tax-free cushion for emergencies in retirement. Many retirees have a carefully planned tax strategy in retirement, which could be upended if they need to access a large chunk of their taxable retirement savings. Pulling $25,000 from a traditional IRA or 401(k) for a health problem or other emergency could throw a wrench in your tax plan for the year. But you can grab that money from your Roth account with no tax consequences.

It may hurt to fund a Roth account with posttax dollars, but the benefits can outweigh the momentary pain.

Enjoy what you have wrought in your Roth

As the brainchild of Senator William V. Roth, tax-advantaged Roth accounts are unlike most traditional defined contribution plans and individual retirement accounts.

Instead of deducting your contributions to these accounts from your income, you contribute money you’ve already paid taxes on into your Roth accounts. The money grows tax free and you can withdraw it tax-free in retirement, provided you wait until you are at least 59½ or have held the account for at least five years. You also don’t have to take required minimum distributions from these accounts, meaning you can leave the money there forever, if you choose.

There are income and contribution limits to these accounts, which can and do change from year to year. And you should be aware that annual IRA and 401(k) contribution limits encompass all accounts you may own, including traditional and Roth versions, meaning you will have to split up your contributions among your accounts so you don’t go over the limit among the various accounts.

Roth accounts offer a flexible way to give yourself a tax-free source of funds in retirement. That’s a helpful gift to provide for your future self.

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