Capital gains tax on Roth IRAs: what you need to know

Summary 

What is a Roth IRA? 

A Roth IRA is a retirement savings product that allows you to contribute after-tax dollars and make tax-free withdrawals.  

It is a powerful retirement savings tool that allows your hard-earned contributed money to grow essentially tax-free, as you do not pay tax on your qualified distributions.  

It’s important to note that you must be over 59½ years of age and have held your account for a minimum of five years to make these tax-free withdrawals.  

Roth IRAs can also be funded from several sources, including: 

A Roth IRA is also less restrictive than other retirement accounts, such as a traditional IRA or a 401(k), as they are not subject to required minimum distributions, and you can contribute to it for as long as you like. 

That said, there are some limitations. For instance, single filers can’t contribute to a Roth IRA if they earn more than $161,000 annually in 2024, while married couples filing jointly cannot earn over $240,000.  

If you’re considering opening this sort of account, you’ll need to thoroughly explore whether it will work for your financial situation, and a regulated financial advisor can help.  

Do I pay capital gains tax on a Roth IRA? 

As mentioned, you do not pay taxes on any qualified distributions from your Roth IRA account. So, you do not pay capital gains tax on your Roth IRA.  

In this way, back-end tax-advantaged retirement accounts, such as a Roth IRA, create a kind of capital gains exemption for retirees. 

You have already paid tax on the money you contribute, so when you withdraw money later in life, you pay no more tax on it. 

Do I pay capital gains tax on a traditional IRA? 

Traditional IRAs work in an opposite way to Roth IRAs; contributions are made pre-tax, and withdrawals are taxed.  

However, withdrawals are taxed as regular income and are not subject to capital gains tax. Instead, the tax you pay is based on what tax bracket you’re in in the year you make the withdrawal.

What are my Roth IRA investment options? 

When contributing money to your Roth IRA, you have a number of investment options, including:  

However, there are also several investment options off-limits to your IRA. 

These include: 

The IRS also prohibits you from contributing cryptocurrency directly to your Roth IRA; however, there are some workarounds.  

You can add crypto to your Roth IRA via purchase. Bitcoin IRAs have been created that allow you to invest in cryptocurrencies. Few Roth IRA providers allow this; however, following the U.S. Securities and Exchange Commission's approval of spot bitcoin ETFs in January 2024, investors may have more access to crypto as an asset class.  

Get expert financial advice when planning for retirement 

When you’re planning for retirement, you make countless big financial decisions – what type of retirement savings account to open, how to invest your money, setting contributions, how much to save, and the list goes on.  

If you don’t have a solid retirement plan, you may struggle with some of these decisions.  

When it comes to big life decisions, it’s important to seek expert financial advice.  

A good place to start is Unbiased. 

Here, you can get matched with an independent SEC-regulated financial advisor who can ensure you’re getting the most out of your current plan and are on course to achieving your retirement goals.   

Connect with a financial advisor today.