What is a Roth IRA and how does it work?

This article is for informational purposes only and does not constitute tax, legal or financial advice. Tax rules and retirement account regulations can vary by individual circumstance. You should consult a qualified tax or financial professional before making any retirement or investment decisions.

What is a Roth IRA?

A Roth IRA is a retirement savings account that allows individuals to contribute after-tax income, invest those funds over time, and potentially take qualified withdrawals tax-free in retirement. It’s designed around one central tradeoff: You pay taxes upfront, with the possibility of avoiding them later.

Unlike a Traditional IRA, Roth IRA contributions aren’t deductible, so contributing doesn’t lower taxable income for the year. Instead, Roth accounts are structured to support long-term retirement savings through tax-free investment growth.

This structure is especially appealing to savers who want more flexibility later in retirement, since qualified withdrawals generally don’t increase taxable income.

Roth IRA vs. Traditional IRA overview

Both Roth and Traditional IRAs are designed to help individuals build long-term retirement savings, but the main distinction is when taxes are paid.

• Roth IRA: No tax break today, potential tax-free withdrawals later
• Traditional IRA: Possible tax break today, taxable withdrawals later

Eligibility is also different. Roth IRAs have income phase-outs that may limit who can contribute. Choosing between the two often comes down to factors like income eligibility, expected future tax rates and overall retirement planning goals.

Read our beginner’s guide to Traditional IRAs

What to know about the Crypto.com Stocks IRA 

Crypto.com Stocks offers an IRA account designed to help eligible US users access long-term retirement investing through the Crypto.com App. Users can choose between a Roth IRA or Traditional IRA.

The account is intended to support investing in US stocks and ETFs while following standard IRS retirement account regulations. This means users may be able to fund the IRA through new contributions, transfer an existing IRA or roll over retirement savings from an old employer plan such as a 401(k).

With access to thousands of equities and ETFs, the Crypto.com Stocks IRA account is built to integrate retirement investing alongside other stocks features in one platform. As with any IRA, eligibility requirements, contribution limits and withdrawal rules still apply.

Open a Crypto.com Stocks IRA account

How a Roth IRA works

A Roth IRA works through a simple long-term cycle: Contributions → investing → growth → withdrawals. Here’s the basic structure:

1. Contribute after-tax income.
2. Choose investments inside the IRA.
3. Allow earnings to grow tax-free over time.
4. Withdraw funds later under qualified IRS rules.

Because Roth IRA contributions are taxed before entering the account, the account doesn’t provide an immediate deduction. Instead, the benefit is mostly future-facing.

Real-world Roth IRA tax example

Imagine you contribute $4,000 to a Roth IRA this year.

• You already paid income tax on that $4,000.
• It enters the Roth IRA account as after-tax savings.
• Any investment earnings remain sheltered from annual taxation.
• If withdrawn under qualified rules, those earnings may be tax-free.

This is why Roth IRAs are often described as accounts that support long-term tax-free compounding.

How a Roth IRA grows

A Roth IRA can grow based on the investments held inside the account. The account itself doesn’t generate returns – the assets you choose may experience growth through market returns or compounding. 

Most Roth IRA providers allow investments such as:

• Stocks
• ETFs
• Bonds
• Mutual funds
• Certificates of Deposit (CDs)
• Treasuries

Why compounding matters
When earnings stay invested year after year, future growth can build on past growth. Consistent contributions over many years may increase the effect of compounding, especially for younger investors.

Why Roth IRA balances fluctuate
It’s also normal for Roth IRA values to rise and fall. People often ask why their Roth IRAs aren’t growing, or even losing money, and the answer is usually investment volatility. None of the account's advantages remove market risk from the assets held in the account, so short-term declines are still possible.

The five-year rules for Roth IRAs

Roth IRAs include two separate five-year timing rules. These rules exist to ensure the accounts remain focused on retirement saving rather than short-term tax strategies.

1. The five-year rule for earnings

To withdraw investment earnings tax-free, you generally need:

• The Roth IRA to be open for at least five years
• A qualifying condition (usually age 59½)

If earnings are withdrawn too early, taxes and penalties may apply.

2. The five-year rule for conversions

Converted funds from a Traditional IRA may also face a separate five-year clock.

• Each conversion has its own five-year period
• Conversion timing affects penalty-free access

Roth IRA contribution limits and income rules

The IRS sets annual Roth IRA contribution limits, which apply across all IRA accounts combined. That means you can’t contribute the maximum separately to both a Roth IRA and a Traditional IRA – the yearly cap covers the total.

Contribution limits may adjust slightly each year for inflation. Always confirm current numbers through IRS guidance or a qualified provider.

Catch-up contributions (age 50+)

If you’re 50 or older, the IRS allows additional catch-up contributions to help savers accelerate retirement funding later in life.

Roth IRA income eligibility

Unlike Traditional IRAs, Roth IRAs include income phase-out ranges. This means eligibility is based on how much you earn. Contribution limits apply to everyone, but income limits determine whether you can contribute the full amount, a reduced amount or not at all.

For example, someone below the phase-out range may contribute normally, while someone within the range may only qualify for a partial contribution. Those above the limit generally can’t contribute directly.

If income exceeds eligibility, other approaches (such as Roth IRA conversions or backdoor contributions) may be an option, though tax rules can be complex.

Roth IRA tax treatment

Roth IRA taxation is easiest to understand if you look at it in three parts:

1. Contributions: Roth IRA contributions are made with after-tax dollars. So, no deduction applies and taxable income doesn’t decrease.
2. Investment growth: Inside the Roth IRA, earnings generally grow tax-free. That means no yearly taxes on dividends, capital gains or interest income. 
3. Withdrawals: Qualified withdrawals may be tax-free, including earnings. However, qualification depends on age, timing and the five-year rule.

Contributions vs earnings 

Contributions and earnings are treated differently in a Roth IRA. Your contributions can generally be withdrawn at any time without taxes or penalties, since they were made with after-tax dollars. Investment earnings, however, are usually restricted until the withdrawal is qualified under IRS rules. 

How does a Roth IRA affect taxes?

A Roth IRA doesn’t reduce taxes today. Instead, it may reduce future taxes by allowing retirement withdrawals that don’t count as taxable income (if qualified).

Roth IRA withdrawal rules

Roth IRA withdrawal rules work differently than Traditional IRA rules. The IRS applies an ordering sequence that determines what is being withdrawn first.

Roth IRA ordering rules

Withdrawals are treated in this order:

1. Contributions
2. Conversions
3. Earnings

This means contributions are usually accessible first and earnings are typically the last and most restricted layer.

Qualified distributions

A withdrawal is usually qualified if the account is at least five years old and the account holder is at least age 59 ½ (or another qualifying condition applies). Withdrawals of earnings before qualification may trigger taxes and penalties.

Withdrawal exceptions

The IRS allows limited exceptions where early withdrawals may avoid penalties. Examples include:

• First-time home purchase (up to IRS limits)
• Birth or adoption expenses
• Qualified education costs
• Disability
• Certain medical expenses

Note that, even when penalties are waived, taxes may still apply depending on the type of withdrawal you make.

What can you invest in with a Roth IRA?

A Roth IRA can hold many investment types, depending on the provider. Common assets include:

• Stocks
• ETFs
• Bonds
• Mutual funds
• CDs
• US Treasuries

The IRS prohibits certain IRA holdings, including:

• Collectibles (art, antiques, rare coins, etc.)
• Life insurance contracts

More ways to invest in the US

Diversification inside a Roth IRA

Diversification generally means spreading your investments across different asset types – such as stocks, bonds or funds – rather than relying on a single holding. The idea is that various investments may react differently over time, which could help balance overall performance.

While diversification can’t eliminate risk or guarantee gains, it’s often discussed as a way to manage volatility and avoid overexposure to one area of the market.

The range of investments available for diversification also depends on your provider. For instance, a bank-based IRA may focus more on CDs or fixed products, while a brokerage Roth IRA may offer broader access to market-based investments like ETFs and individual stocks.

Differences between a Roth IRA and a Traditional IRA

Your full guide to Roth IRAs vs. Traditional IRAs

Roth IRA conversions: The basics

A Roth IRA conversion happens when money from a Traditional IRA or another pre-tax retirement account is moved into a Roth IRA. Because those funds have not yet been taxed, the converted amount is generally treated as taxable income in the year of the conversion.

Some people consider conversions when they want Roth IRA tax treatment later in retirement, but the timing and tax implications can be complex. Converted funds may also follow their own five-year rule before they can be withdrawn penalty-free, which is why professional guidance is often helpful in this area.

How to open a Roth IRA

Opening a Roth IRA is usually straightforward through a bank, brokerage or retirement provider. Most providers will require that you have earned income, a Social Security number and some basic personal information. You’ll also need a funding method, such as a direct contribution, transfer or rollover from another retirement account

Steps to open a Roth IRA

1. Choose an IRA provider.
2. Open the account online or through an advisor.
3. Fund it through contributions, transfers or rollovers.
4. Select investments inside the IRA.
5. Track eligibility and contribution rules each year.

Choosing the right provider for your IRA

People often compare providers based on factors like fees and minimum balances, the investment options available to them, the platform experience and reporting tools, long-term rollover flexibility, as well as educational and customer support resources.

Learn how to choose an IRA provider

FAQs about Roth IRAs

What is a Roth IRA in simple terms?
A Roth IRA is a retirement account that lets you save and invest after-tax money for the long term. Its main benefit is that qualified withdrawals in retirement may be tax-free.

How does a Roth IRA work?
A Roth IRA works by allowing you to contribute funds, invest them inside the account, and let earnings build over time. If IRS requirements are met, you can withdraw money later in retirement without paying additional taxes on qualified distributions.

How does a Roth IRA grow?
It can grow through investment returns such as stock gains, dividends or interest income. Because growth is generally tax-free inside the account, compounding over many years may support long-term retirement savings.

Why do people open a Roth IRA?
Many people open a Roth IRA for the potential benefit of tax-free retirement income later. Roth accounts can also offer flexibility, since contributions may be withdrawn without taxes or penalties under IRS rules.

Why is my Roth IRA losing money?
Any IRA can hold investments that rise or fall in value, so losses are possible during market downturns. Tax advantages don’t eliminate investment risk, especially over shorter time periods.

Can I withdraw contributions anytime?
Yes, Roth IRA contributions can generally be withdrawn at any time without taxes or penalties, since they were already taxed. Investment earnings, however, usually require qualified conditions to avoid taxes or penalties.

What’s the difference between Roth and Traditional IRAs?
Roth IRAs involve paying taxes upfront, with the possibility of tax-free qualified withdrawals later. Traditional IRAs may offer deductions today, but withdrawals in retirement are generally taxed as ordinary income.

Who qualifies for a Roth IRA?
Eligibility depends on earned income and IRS income phase-out ranges, which may limit or prevent contributions for high earners. Some individuals may qualify for reduced contributions, while others may not be eligible to contribute directly.

Important information: This is informational content sponsored by Crypto.com and should not be considered as investment advice.

Foris Capital US LLC (“FCUL” or referred to herein as “Crypto.com Stocks”) is a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a Member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). For further information about FCUL, please visit FINRA BrokerCheck.
FCUL is a subsidiary of Crypto.com. 

FCUL is a separate entity from Crypto.com, Foris DAX, Inc., and other affiliated Foris companies. FCUL does not engage in the sale, transfer or custody of crypto currencies or digital assets. Crypto.com is a separate entity from FCUL and does not engage in the securities business. Customer balances and crypto holdings held and transacted at Crypto.com and other entities outside of FCUL are not covered by SIPC insurance and are separate from securities transactions and holdings at FCUL. Fractional shares are not available for all equities.

Crypto.com IRA services are offered to eligible U.S. users only. Eligible customers can open a Traditional IRA or Roth IRA with Foris Capital US, which supports stocks and cash, and a separate Traditional IRA or Roth IRA with Foris DAX Trust Company, LLC, which supports digital assets only. All services and features related to digital assets apply to the IRA provided by Foris DAX Trust Company, LLC, not by Foris Capital US, LLC. IRA features are subject to regulatory requirements and availability. All accounts are subject to eligibility requirements, and applicable terms and conditions. Users should consult with independent tax and financial advisors regarding their individual situation.

Recurring Buy is offered in the IRA provided by Foris DAX Trust Company LLC, and Stocks IRA Recurring Buy is offered in the IRA by Foris Capital US LLC. Whale baskets are only available in the IRA offered by Foris Capital US LLC.

All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. Past performance does not guarantee future results.