Unlock the Full Power of Your Roth IRA
When it comes to tax-free income in retirement, the Roth IRA is hard to beat but only if you know how to use it right.
I’ve seen too many people miss out on key benefits, or worse, get hit with penalties simply because they didn’t fully understand the rules. So let’s break it down: how Roth IRAs work, the rules you need to follow, and how to use them to create a powerful, tax-free retirement strategy.
First, why Roth IRAs are such a big deal.
Unlike traditional retirement accounts, Roth IRAs offer tax-free growth and withdrawals in retirement. That means you don’t pay taxes on the money you pull out later huge for planning your income in retirement. And they’re also great legacy tools, as beneficiaries can inherit Roth assets tax-free.
Now let’s talk about the three sources of money inside a Roth IRA: contributions, conversions, and growth.
- Contributions are the easiest to manage. You can withdraw them at any time, for any reason, tax- and penalty-free—regardless of your age.
- Conversions are a little trickier. Each conversion has its own five-year rule, especially if you’re under age 59.5. More on that in a minute.
- Growth is where the biggest benefits are, but also where the rules get tighter. You can’t access growth tax-free unless you’re over 59.5 and have satisfied the five-year rule.
The five-year rule trips up a lot of people.
Here’s how it works: Your Roth IRA must be open for at least five years before you can take tax-free withdrawals of growth. That five-year clock starts with your first contribution—not each new deposit or account.
So if you opened your first Roth at age 40 and you’re now 60, you’re good to go—even if you’ve opened new Roth accounts since then. But if you opened your first Roth at 58 and want to access growth at 60, you’ll need to wait until 63 to get full tax-free treatment.
Conversions have their own five-year rule—and it resets with each one. Let’s say you make conversions at ages 50, 51, and 52. You can’t touch the money from each conversion until five years after each respective date unless you’re over 59.5 and you’ve met the general five-year rule.
That’s why Roth conversions are better suited for long-term planning. If you’ll need the money in the next few years, it might not make sense to convert.
Contribution limits for 2025 are pretty straightforward:
- $7,000 if you’re under 50
- $8,000 if you’re 50 or older
There’s no limit on conversions, but remember—every dollar you convert is taxed as ordinary income in the year you convert it. If you convert $1 million in a single year, it’s like adding $1 million to your W-2. Be strategic.
How does the IRS track your withdrawals?
They assume you withdraw money in this order:
- Contributions
- Conversions
- Growth
This simplifies things for you. If you’ve got $25,000 in each bucket, the first $25K you pull is always a contribution—tax-free, no matter what.
So what’s the big takeaway?
The Roth IRA is a powerful tool, but only if you understand how to use it. Make sure you know when the five-year rules apply, when conversions make sense, and how to use Roth money for long-term tax-free growth. The longer you let your Roth grow, the more powerful it becomes.
If you play by the rules and plan smartly, a Roth IRA can become one of the most valuable tools in your retirement plan.
You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns.
Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.
