How a Roth IRA Works: Limits, the Five-Year Rule and the Backdoor

A Roth IRA is a retirement account you open yourself, at the broker of your choice. You pay tax on the money before it goes in. After that, the growth is yours: no tax on dividends, no tax on gains, and no tax when you take the money out in retirement. This guide explains how the account works, who can pay in, the five-year rule that decides when the growth is tax-free, and the backdoor route for higher earners. All figures are for 2026.

How a Roth IRA works

You open the account at a broker (Fidelity, Schwab, Vanguard or any other). You pay in from your bank account, then you choose the investments. Unlike a 401(k), there is no plan menu: a Roth IRA can hold almost anything your broker lists, such as stocks, ETFs, index funds, bonds and cash.

Taxed now, tax-free later

The Roth deal is the opposite of a traditional IRA.

• Traditional IRA. The payment can be deductible today. Everything comes out as ordinary income later: the contributions and the growth together.
• Roth IRA. No deduction today. A qualified withdrawal (in most cases, five years on the account and age 59½) comes out with no tax at all.

The choice is a bet on your tax rate. Roth wins if your rate in retirement is higher than today, or if you expect decades of growth. Early in a career, when your pay and your tax rate are low, the Roth side is often the better bet.

What happens inside the account

While the money stays in the account, nothing is taxed: no tax on dividends, no tax on gains when you sell, no difference between short-term and long-term. You can rebalance as often as you want at no tax cost. And because the money comes out tax-free, the growth is not deferred, it is exempt. That makes a Roth IRA a good home for the holdings you expect to grow the most.

One cost the account cannot remove: tax that a foreign country withholds on its dividends. A Roth IRA cannot claim the foreign tax credit, so that withholding is lost for good. Canada is the exception, because the US-Canada tax treaty exempts IRAs from Canadian withholding on dividends. Read more in what is dividend withholding tax.

The 2026 limits

The limit is per person, not per account. Your traditional IRAs and your Roth IRAs share one limit: if you put $3,000 in a traditional IRA, you can put only $4,500 in a Roth IRA for the same year. You can also not pay in more than your taxable pay for the year. A spouse with no pay can still have a Roth IRA on the income of the other spouse (a spousal IRA), if you file jointly.

The IRA deadline is the only American retirement limit that stays open after December 31. You can make a 2026 contribution until the tax filing date in April 2027. Tell your broker which year the payment is for. The figures come from the IRS announcement for 2026 and the IRS table of limits by year.

Who can pay in: the income limit

A Roth IRA has an income limit. A traditional IRA and a Roth 401(k) do not. Above a range of modified adjusted gross income (MAGI), your Roth contribution limit goes down, then stops.

Inside the range, you can pay in a part of the limit. IRS Publication 590-A has the worksheet. The range for married filing separately is not indexed to inflation, so it stays at $0 to $10,000 every year.

If you pay in too much, or pay in when your income is too high, the excess has a 6% tax for each year it stays in the account. Remove it (with its earnings) before the filing deadline to avoid the tax.

Getting money out: the five-year rule

A Roth IRA has two parts, and the tax rules are different for each.

Your contributions: always free

The money you paid in was already taxed. So you can take your contributions back at any time, at any age, with no tax and no penalty. The IRS also treats each withdrawal as contributions first: you touch the growth only when you have taken out more than you paid in.

This makes a Roth IRA more flexible than it looks. It is still a retirement account, and money you take out cannot go back in later (apart from the limit of the year). But the contributions are not locked.

Your growth: free on a qualified withdrawal

The earnings are tax-free only on a qualified withdrawal. Two conditions must both be true:

1. Five years. At least five tax years since your first contribution to any Roth IRA. The clock starts on January 1 of the year of that first contribution. A contribution for 2026 made in April 2027 still starts the clock on January 1, 2026.
2. One of four events. You are 59½ or older, you are disabled, the payment goes to your heirs after your death, or you use up to $10,000 (a lifetime limit) to buy your first home.

If the withdrawal is not qualified, the earnings are ordinary income, and before 59½ they also have the 10% additional tax, unless an exception applies. The full rules are in IRS Publication 590-B, and the exceptions to the 10% are in IRS Topic 557.

The five-year clock runs once, for all your Roth IRAs together. So it can make sense to open a Roth IRA early, even with a small amount, to start the clock.

No required minimum distributions

You never have to take money out of your own Roth IRA, at any age. A traditional IRA forces withdrawals from age 73. A Roth IRA can grow untouched for your whole life, which also makes it a good account to leave to your heirs (they will have to draw it down under their own rules). See the IRS page on required minimum distributions.

The backdoor Roth: a route for higher earners

If your income is above the limit, you can still get money into a Roth IRA. There is no income limit on a conversion from a traditional IRA. The backdoor Roth uses that:

1. Pay into a traditional IRA, with no deduction (a nondeductible contribution).
2. Convert it to your Roth IRA, usually a few days later.
3. Report both steps on Form 8606 with your tax return.

Because the money was already taxed and had little time to grow, the conversion costs little or no tax.

The pro-rata rule

The backdoor is simple only if you have no other pre-tax money in a traditional, SEP or SIMPLE IRA. The IRS looks at all those accounts together on December 31 of the year of the conversion. If 90% of that total is pre-tax money, then 90% of your conversion is taxable, even if you convert only the new nondeductible dollars.

Many people avoid this by rolling their old pre-tax IRA money into their current 401(k) first, if the plan accepts it. A 401(k) is not part of the pro-rata count.

Each conversion has its own clock

A conversion starts its own five-year clock for the 10% penalty. If you are under 59½ and take out converted money within five years of that conversion, the 10% can apply to the part that was taxable at conversion. Keep a record of each conversion and its date.

Roth IRA or Roth 401(k)?

You can have both, and many people do. They have separate limits.

A common order of priority: first contribute to your 401(k) up to the full employer match, then fill a Roth IRA, then go back to the 401(k). Read how a 401(k) works for the match and the vesting schedule.

Track your Roth IRA with the rest of your portfolio in Cadances

A Roth IRA is usually one account among several: a 401(k) at work, maybe an old plan from a previous job, a taxable brokerage account. Cadances is a portfolio tracker: it puts all of them in one place and gives you one total, one allocation and one performance figure.

• An account type priced the way the law prices it. On the Portfolios screen, the Roth IRA is its own account type, next to the traditional IRA, the 401(k), the Roth 401(k), the HSA and your taxable accounts. Dividends and gains inside it show as exempt, so your income forecast is not cut by a tax you do not pay.
• The five-year clock, made visible. Enter the date you opened your first Roth IRA, and the Tax screen tells you if the five-year rule is met. If you do not enter a date, Cadances does not assume the clock has passed. The same screen shows the 2026 limit with the catch-up your age unlocks, reminds you that the limit is shared with your traditional IRAs, and prices what an early withdrawal would cost: tax on the earnings only, because your contributions come back free.
• All your brokers in one place. Import the export file from your broker, or add your holdings by hand. A Roth IRA at one broker and a 401(k) at another sit in the same view.
• Performance and allocation. On Performance, compare your Roth IRA with the S&P 500, or with your 401(k), over the window you pick. Set allocation rules on each portfolio (for example, no single stock above 10%) and see when your mix drifts away from your target.

Two limits to keep in mind: Cadances does not know your income, so it cannot check the income limit for you, and it does not record conversions, so keep the dates of your backdoor conversions with your Form 8606.

Start free. Create your Cadances account: no card, no time limit. The Free plan holds one portfolio of up to 15 holdings, which is enough for one Roth IRA. To track your Roth IRA, your 401(k) and your taxable account side by side, compare the paid plans.

The bottom line

• A Roth IRA takes taxed money today and gives back tax-free growth later.
• In 2026 you can pay in $7,500, or $8,600 from age 50, shared with your traditional IRAs.
• Check the income limit before you pay in. Above it, look at the backdoor Roth and the pro-rata rule.
• Your contributions can come out at any time. The growth is tax-free after five years and age 59½.
• Open one early to start the five-year clock.

Each monthly payment is dollar-cost averaging by design, and a diversified mix inside the account matters as much as the amount you put in.

This article is general information, not tax or legal advice. Your own situation decides which rules apply to you.