What Is a Roth IRA? How it Works and How to Open

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that lets you contribute after-tax money to save for retirement. The main draw of a Roth IRA is that the money grows tax-free and can be withdrawn tax-free after age 59 ½ as long as the account has been open for at least five years.

The main difference between a Roth IRA and a traditional IRA is how it's taxed. In a traditional IRA, contributions are tax-deductible in the year they're made, but withdrawals in retirement are taxed.

» View our picks for the best Roth IRAs.

How does a Roth IRA work?

You contribute to a Roth IRA using money that has already been taxed. Those contributions can then be invested in stocks, ETFs, bonds, or more. Over time, the investments in your Roth IRA could earn a return, growing tax-free. In retirement, you'll also get to withdraw those earnings tax-free as long as Roth IRA withdrawal rules are followed.

You can contribute to a Roth IRA using money earned from a job, but contributions could also come from a Roth 401(k) plan rollover, a conversion from an existing traditional IRA or 401(k) plan, a spousal contribution, or other transfer.

» See how your contributions can grow with our free Roth IRA calculator.

💸 How do I open a Roth IRA?

A Roth IRA can be opened at a traditional broker or robo-advisor, but before you get started, double-check if you qualify to make contributions.

» Step-by-step: H ow to open a Roth IRA

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Roth IRA income limits

When it comes to Roth IRAs, whether you can contribute directly — and how much you can contribute — depends on your tax filing status and annual income.

If your modified adjusted gross income (MAGI) is below $146,000 (single filers) or below $230,000 (married filing jointly), you can contribute the full amount the IRS allows to a Roth IRA — $7,000 for those under 50 and $8,000 for those 50 and older. At incomes above the limits, the amount you can contribute becomes smaller until you are no longer eligible.

Roth IRA income and contribution limits

Filing status	Roth IRA income limits 2024	Roth IRA contribution limits 2024
Single, head of household, or married filing separately (if you didn't live with spouse during year)	Less than $146,000.	$7,000 ($8,000 if 50 or older).
	$146,000 or more, but less than $161,000.	Contribution is reduced.
	$161,000 or more.	No contribution allowed.
Married filing jointly or surviving spouse	Less than $230,000.	$7,000 ($8,000 if 50 or older).
	$230,000 or more, but less than $240,000.	Contribution is reduced.
	$240,000 or more.	No contribution allowed.
Married filing separately (if you lived with spouse at any time during year)	Less than $10,000.	Contribution is reduced.
	$10,000 or more.	No contribution allowed.

» Learn more about Roth IRA contribution and income limits.

💡 Don't qualify for a Roth IRA contribution?

High-earners could explore doing a backdoor Roth IRA to convert funds from a traditional IRA into a Roth, or a mega backdoor Roth to convert from a 401(k) plan to a Roth IRA (if your plan allows).

Rules for Roth IRA withdrawals

Setting aside money in a retirement account — and not being able to access it for years — can feel intimidating. With a Roth IRA, it's a little different. Here's a quick explainer on the rules of withdrawing from your Roth IRA.

Roth IRA withdrawal rules

You can withdraw your original contributions whenever you want, without owing any penalties or taxes, no matter how long your account has been open. That's because the money you put in is money you've already paid income tax on.

When you withdraw money from a Roth IRA, the IRS always assumes your original contributions come out first.

People at least 59½ years old and who have held their accounts for at least five years can take distributions, including earnings, without paying federal taxes
Internal Revenue Service. Traditional and Roth IRAs. Accessed Sep 19, 2024.
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In contrast to the traditional IRA, Roth IRAs do not have required minimum distributions (RMDs), in which account holders are required to withdraw a certain amount every year in retirement. Instead, with a Roth IRA, the account owners are not required to make withdrawals during their lifetime.

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Roth IRA withdrawal penalty

Qualified withdrawals of investment earnings in the account come out tax-free. The key here is "qualified." If you withdraw earnings before 59½ or otherwise don’t meet the rules for a qualified withdrawal, the IRS may want a piece of those returns in the form of taxes and a possible penalty.

Examples of qualified withdrawals before age 59½ include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, and having a baby or adopting. Be sure you understand all the rules of these exceptions.

» Get the details on Roth IRA withdrawal rules.

Frequently asked questions

What are the Roth IRA benefits?

What makes a Roth IRA so attractive to investors is the potential tax savings. If you think you'll be in a higher tax bracket when you retire than you are now, a Roth IRA may be more beneficial than a traditional IRA. The reason: You've already paid taxes on your contributions, so your higher tax bracket won't result in a high tax bill when it's time to enjoy your hard-earned money.

Another reason the Roth IRA is attractive is rising inflation. Inflation erodes the value of money over time. Giving your money an opportunity to grow tax-free can be extra lucrative when inflation is high.

» Learn more about Roth IRA pros and cons

What are the Roth IRA disadvantages?

There are a few drawbacks of a Roth IRA:

Five-year wait to withdraw earnings: Waiting five years from the tax year of your first Roth IRA contribution to withdraw earnings tax-free can be a drawback if you’re close to retiring. Withdrawing contributions before fulfilling the five-year rule could result in paying income taxes and a 10% penalty.
No tax deductions: You also aren’t eligible for any tax deductions during the year you contribute, unlike with a traditional IRA. Tax deductions are helpful as they can reduce your adjusted gross income, and your overall tax bill for the year you contribute. You may qualify to claim the saver’s credit, which is a tax credit you get for making eligible contributions to an IRA. Keep in mind that the credit has income restrictions.
Income limits: Roth IRAs have income limits unlike traditional IRAs. If you make more than the allowed amount, you may not qualify for a Roth IRA.

Should you contribute to a 401(k) or a Roth IRA?

You don't have to choose. As long as you're eligible for a Roth IRA, you can contribute to that alongside an employer-sponsored retirement plan like a 401(k). But that, of course, requires having enough money to contribute to both, which isn't always possible. If you need to choose one place to direct your dollars, read our comparison of 401(k)s vs. IRAs.

Can you lose money in a Roth IRA?

Yes. You can put your Roth IRA money in a variety of investments, and some of those investments may lose value, especially in the short term. It's important to understand your risk tolerance when choosing investments. Learn more about how to invest your IRA.

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