How Roth Accounts Grow Tax-Free: Roth IRA and Roth 401(k)

Put $10,000 into an account. Suppose it grows to $40,000 by the time you retire. Of that, $10,000 is money you deposited. The other $30,000 is growth. Which account holds it decides how much of the $30,000 you get to keep.

That $4,500 is the low estimate. A taxable account also sends a bill most years for dividends and for gains a fund distributes, and paying it pulls out money that would have gone on compounding for decades. The Roth sends no such bill.

Tax going in, none coming out

A Roth account takes money you have already paid income tax on. There’s no deduction for the deposit. What you get back is growth that is never taxed, provided the withdrawal is qualified.

You pay tax on the $10,000 today. In exchange, the $30,000 of growth is never taxed at all. Whether that beats a deduction now depends on your tax rate today against your rate in retirement, and the Roth or traditional IRA comparison works through that choice bracket by bracket.

The age test and the five-year test

A Roth IRA withdrawal of earnings is qualified when both hold. You are 59½ or older. At least five tax years have passed since your first contribution to any Roth IRA.

The five-year clock has a quirk in your favor. It starts on January 1 of the tax year your first contribution counted toward, which can be well before the day the money actually moved, so a deposit made in April and credited to the prior tax year starts the count on January 1 of that prior year and hands you most of a year for free.

It only runs once. A second Roth IRA opened later shares the first one’s start date.

Meeting one test says nothing about the other. Say your first Roth IRA contribution counts toward the tax year you turn 57. You pass the age test at 59½. The five-year test isn’t met until January 1 five years on, when you are 62, so earnings taken at 60 are not qualified, and although they escape the early-withdrawal penalty because you are past 59½, they are still taxed as income. Wait two more years and the same dollars come out with nothing owed.

Late starters feel this most. Open a small Roth early. The clock is then done long before you need the money.

A few other events also qualify a withdrawal: disability, death (the money goes to a beneficiary), and a first home purchase up to a lifetime cap. Anything taken before the tests are met falls under ordering rules, which the lesson on early Roth withdrawals works through.

Roth IRA against Roth 401(k)

Both grow on identical terms. They differ in who may use them and how much fits.

	Roth IRA	Roth 401(k)
Where it sits	An account you open yourself	Inside your employer’s plan
Income test	Contributions phase out above an income range	None
Yearly limit	Lower	Higher, and separate from the IRA limit
Five-year clock	One clock for all your Roth IRAs	Each plan keeps its own
RMDs for the owner	None	None, since 2024

The last row changed recently. A Roth 401(k) owner used to face required minimum distributions, which is why many people rolled the money into a Roth IRA at retirement. SECURE 2.0 dropped that requirement for Roth 401(k) owners starting in 2024. Heirs still have their own rules.

You can fund both in the same year. The limits don’t overlap.

Limits change. The IRS announces each new year’s contribution limits and the Roth IRA income range every fall, and Publication 590-A carries them once the year starts.

What the growth assumes

Tax-free growth is only as large as the growth itself. A Roth holding cash grows slowly, and a Roth that loses money shelters nothing. The account is a wrapper. What you hold inside it, and for how long, still sets the result, and the longer the money stays the more the missing tax bills add up. More on the retirement side of that is under retirement topics.

The next lesson takes up the question most new Roth savers ask within a year: what happens if you need the money before 59½, and which dollars come out first.