Module 1: What Is a Roth IRA?

Money contributed to a Roth IRA is generally contributed after taxes have already been paid on that income. Because Roth IRA contributions are not tax-deductible, you do not receive an upfront tax deduction for putting money into the account. However, if IRS requirements are met, qualified withdrawals can be completely tax-free in retirement.

The IRS describes Roth IRA contributions as nondeductible and qualified distributions as tax-free.

Think of a Roth IRA Like a Container

A Roth IRA is an account — not an investment.

Opening a Roth IRA by itself does not automatically mean your money is invested.

You put money into the container, and then you may choose investments to hold inside it.

Depending on the provider, those investments may include things such as:

Stocks
Bonds
Mutual funds
Exchange-traded funds (ETFs)
Other permitted investments

Roth IRAs are tax-advantaged retirement accounts in which earnings can come from interest, dividends, or capital gains generated by investments held in the account.

Example

Imagine you open a Roth IRA and deposit $100.

If that $100 remains sitting in the account as cash, you have opened and funded a Roth IRA — but you may not actually have invested the money yet.

If you use that $100 to purchase an investment available through your account, the value of that investment can then rise or fall over time.

We'll explore this distinction more in Module 3.

Why Is It Called a “Roth” IRA?

There are several types of Individual Retirement Accounts.

Two common types are:

Traditional IRA
and
Roth IRA

Both are designed for retirement savings, but their tax treatment is different.

With a Roth IRA, contributions are made with after-tax dollars. Investor.gov explains that Roth IRA contributions are not tax-deductible, while account earnings and withdrawals are generally tax-free when applicable requirements are satisfied.

We'll focus specifically on Roth IRAs throughout this course.

Assess A Situation

Meet Jordan, a 20-year-old college student.

Jordan works part-time while attending school and earns money from their job.

Jordan decides to learn about retirement investing and opens a Roth IRA.

Jordan contributes:

$50 per month

That equals:

$600 per year

Jordan then chooses investments inside the Roth IRA.

Jordan isn't contributing thousands of dollars every month. The important point is that Jordan has started learning how retirement investing works and has given those investments potentially many years to grow.

Investment growth is not guaranteed, and account values can rise or fall. We'll talk much more about investment risk later in the course.

Who Can Contribute?

Having a Roth IRA does not mean anyone can contribute any amount they want.

Roth IRA contributions are subject to IRS rules, including:

earned-income requirements,
annual contribution limits, and
income-based eligibility limits.

For 2026, the combined contribution limit across an individual's Traditional and Roth IRAs is generally $7,500, or $8,600 for individuals age 50 or older. Your contribution also generally cannot exceed your eligible compensation for the year.

Roth IRA eligibility can also be reduced or eliminated at higher income levels.

Don't worry about memorizing those numbers right now. Contribution limits can change from year to year, so you should always check the current IRS rules.

Why Might Someone Choose a Roth IRA?

A Roth IRA can be appealing because it allows eligible individuals to:

save specifically for retirement,
invest money for potential long-term growth,
make contributions using after-tax dollars,
potentially receive qualified retirement withdrawals tax-free, and
keep money in the account during their lifetime without being required to take annual withdrawals as the original owner.

The IRS states that original Roth IRA owners are not required to take required minimum distributions during their lifetime.

That does not mean a Roth IRA is automatically the best account for everyone. Your income, financial goals, taxes, time horizon, risk tolerance, and other circumstances all matter.

Quick Check: Can You Spot the Difference?

ead the scenarios below

Taylor opens a Roth IRA and transfers $200 into the account. Taylor does not purchase any investments.

Which statement is correct?

A. Taylor has automatically invested $200 in the stock market.
B. Taylor has funded a Roth IRA, but the money may still be sitting in cash.
C. Taylor is guaranteed to earn interest because the money is inside a Roth IRA.
D. Taylor cannot contribute until age 30.

Marcus is 19, works a part-time job while attending college, and earns eligible compensation during the year. He wants to begin saving for retirement.

Which statement is most accurate?

A. Marcus is automatically too young to contribute to a Roth IRA.
B. Marcus may be able to contribute to a Roth IRA because Roth IRA eligibility is not based on reaching a minimum adult age; IRS income and compensation rules apply.
C. Marcus can contribute any amount he wants because he has a job.
D. Marcus must wait until he receives a full-time job with retirement benefits.

Aaliyah contributes money to her Roth IRA and uses it to purchase an investment. Several months later, the market value of the investment decreases.

Which statement is correct?

A. Roth IRAs guarantee that investments cannot lose value.
B. The financial institution must replace any money Aaliyah loses.
C. Investments held inside a Roth IRA can rise or fall in value.
D. The decrease means Aaliyah's Roth IRA is no longer a retirement account.

Module 1 Takeaway

Remember these four things:

1. A Roth IRA is a retirement account.

2. Contributions are generally made with after-tax dollars.

3. Qualified withdrawals can be tax-free when IRS requirements are satisfied.

4. A Roth IRA is not itself an investment — you generally choose investments to hold inside the account.

Module 1 Activity — Answer Key

Scenario 1 — Correct Answer: B

Taylor has funded a Roth IRA, but the money may still be sitting in cash.

A Roth IRA is an account, not an investment itself. Putting money into the account does not necessarily mean the money has been invested. Taylor would generally need to select and purchase an investment available through the account.

Scenario 2 — Correct Answer: B

Marcus may be able to contribute to a Roth IRA because IRS eligibility rules focus on factors such as eligible compensation and income—not simply age.

Having a part-time job does not automatically guarantee that Marcus can contribute any amount he chooses. Roth IRA contributions are subject to IRS contribution limits, compensation requirements, and income restrictions.

Scenario 3 — Correct Answer: C

Investments held inside a Roth IRA can rise or fall in value.

The Roth IRA provides certain tax advantages, but it does not eliminate investment risk or guarantee returns. If Aaliyah chooses investments inside her account, their market value may increase or decrease over time.