If you’re thinking of opening a Roth IRA, you’ve probably got questions. And that’s okay—before you commit to putting your money into an investing account, it’s a good idea to learn everything you can about it.
So, let’s go over everything you need to know about a Roth IRA and why it’s a great way to start growing your retirement savings. Ready to jump in? Let’s do it.
Key Takeaways
- A Roth IRA is a retirement account that lets you invest after-tax dollars now so you can make tax-free withdrawals for retirement after the age of 59 1/2.
- Roth IRAs don’t have age restrictions. You’re eligible to contribute up to the limit as long as your income doesn’t exceed the Roth IRA income limit.
- Unlike a traditional IRA, which requires you to start taking withdrawals at age 73, a Roth IRA has no required minimum distributions (RMDs). That means you can leave your money in a Roth IRA to grow longer.
- Qualified beneficiaries can take withdrawals from an inherited Roth IRA at any time without being penalized, but they may still have to pay taxes on earnings.
What Is a Roth IRA?
A Roth IRA (aka Individual Retirement Account) is a retirement account that lets you save up to a certain amount each year for retirement. It really is the rock star of retirement accounts! Roth IRAs are easy to set up, simple to maintain, and come with tax advantages that help you build wealth and boost your retirement savings over the long haul.
In fact, we’re big fans of a Roth IRA because of those tax advantages. We’re talking tax-free growth and tax-free withdrawals once you retire. Now, that’s a sweet deal!
How Does a Roth IRA Work?
When you put money into your Roth IRA, you’ve already paid taxes on it. Why is that important? Because it means you won’t pay any taxes when you use that money in retirement. And all the growth on your contributions will be tax-free too.
That’s a huge deal worth repeating: Any withdrawals you make after age 59 1/2 are tax-free, as long as you’ve had the account more than five years.1 More on that five-year rule in a bit.
Before we get into the details, keep a couple of things in mind. First of all, a Roth IRA isn’t an investment in itself—think of it as an umbrella that covers your investments and protects them from taxes. You can put all kinds of different investments into your Roth IRA.
The second thing to remember is that a Roth IRA is separate from your employer-sponsored retirement savings plan. Some employers offer Roth 401(k) plans. You can learn about the difference between a Roth IRA and a Roth 401(k) in the FAQ section at the end of the article.
Who’s Eligible for a Roth IRA?
This one’s easy, folks. If you earn income and it’s less than the Roth income requirements, which we’ll cover below, then you’re eligible.
But you can’t contribute more than you make. So, if your 19-year-old son or daughter earned $3,000 waiting tables over the summer, they can only contribute up to $3,000 to a Roth IRA.2
Another perk: There are no age restrictions with Roth IRAs. Whether you’re 17 years old or you just turned 92, you can contribute to your account as long as you’re earning an income.
What Are the Advantages of a Roth IRA?
Let’s start with the tax impact. When you make contributions after taxes, that means you’ve already paid taxes on the money you set aside for retirement. That helps your retirement savings go a lot further because they grow tax-free.
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So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when you withdraw that money in retirement. That’s a huge perk, especially for folks who expect to be in a higher tax bracket when they retire. Talk about a win!
Here are a few more benefits of a Roth IRA:
- You’re not required to take distributions at a certain age, unlike the traditional IRA (which requires withdrawals starting at age 73).3
- You can keep contributing to your Roth IRA if you choose to work past retirement age, as long as your income still falls within the income limits we’ll discuss a little later.
- You can choose beneficiaries to inherit your Roth IRA, and they’ll be able to use the money in the account tax-free too.
Roth IRA vs. Traditional IRA: How Do They Compare?
Do you have a hard time remembering the difference between a Roth IRA and a traditional IRA? You’re not alone. While both types of IRAs help people save for retirement, the main difference between a Roth IRA and a traditional IRA is how they’re taxed. We’ve touched on this already, but let’s break it down:
- Roth IRAs are funded with after-tax dollars, and that means your investments grow tax-free. And you can use the money in your Roth IRA tax-free when you retire.
- Traditional IRAs are funded with pretax money—so you get a tax break now, but you’ll have to pay taxes on any money you withdraw in retirement, including all the growth on your contributions.
Take a look at a side-by-side comparison of a traditional IRA and a Roth IRA:
|
Traditional IRA |
Roth IRA |
|
|
Contributions |
In most cases, contributions are tax deductible. |
Contributions are not tax deductible. |
|
Income Limits |
You can contribute no matter how high your annual income is. |
In 2023, you can contribute up to the maximum amount if your gross income is:
For 2024, those gross income limits have been adjusted for inflation:
|
|
Mandatory Withdrawals |
You have to make annual withdrawals from your IRA after you turn 73.5 |
No withdrawals are required at any age if you’re the original owner. |
|
Taxes on Withdrawals |
You have to pay taxes on withdrawals in retirement. |
You aren’t taxed on withdrawals in retirement.6 |
2023 and 2024 Roth IRA Contribution Limits
You knew there had to be a catch! Unfortunately, Uncle Sam says you can’t just put as much money as you want into an IRA. For 2023, the total amount you can contribute to either a Roth IRA or a traditional IRA is $6,500—or $7,500 if you’re age 50 or older. The good news is, that limit is rising a bit for 2024 to $7,000 ($8,000 if you’re 50 or older).7
If you're considering rolling over your 401(k) to a Roth IRA, though, we have good news! Rolling over your money doesn't count toward your contribution limit. Just be sure to check with your financial advisor about how rolling over your retirement can affect taxes.
2023 and 2024 Roth IRA Income Limits
A Roth IRA offers some great tax benefits, but those benefits aren’t available for everyone. Once your income reaches a certain amount, you’ll either have to contribute a reduced amount or not contribute at all.
Here’s how the 2023 and 2024 Roth IRA income limits and contribution limits play out:
|
Filing Status |
Roth IRA Income Limits |
Roth IRA Contribution Limits |
|
Single or Head of Household |
2023: Less than $138,000 2024: Less than $146,000 |
2023: $6,500 ($7,500 if age 50 or older) 2024: $7,000 (8,000 if age 50 or older) |
|
|
2023: More than $138,000 but less than $153,000 2024: More than $146,000 but less than $161,000 |
Contribution is gradually reduced |
|
|
2023: $153,000 or more 2024: $161,000 or more |
No contribution allowed |
|
Married, Filing Jointly or Qualifying Widow(er) |
2023: Less than $218,000 2024: Less than $230,000 |
2023: $6,500 ($7,500 if age 50 or older) 2024: $7,000 ($8,000 of age 50 or older) |
|
|
2023: More than $218,000 but less than $228,000 2024: More than $230,000 but less than $240,000 |
Contribution is gradually reduced |
|
|
2023: $228,000 or more 2024: $240,000 or more |
If your income exceeds the Roth IRA eligibility limits, good for you—but bad for your ability to open a Roth IRA. You won’t be able to stash your cash in a Roth, but a traditional IRA might be an option. Tax benefits for traditional IRAs have different eligibility requirements, so check with an investing pro to see if it’s a good choice for you.
If you’re self-employed, here’s another option: Establish a Simplified Employee Pension Plan (SEP) or a solo 401(k). Or if you run a small company with employees, consider a SIMPLE IRA that’ll allow you and your team members to save for retirement.
Roth IRA Withdrawal Rules
Okay, folks. We’ve covered the advantages of a Roth IRA, including the fact that you pay taxes on your contributions up front. And when it comes to early withdrawal rules, that can be good and bad news.
Here’s an overview of withdrawal rules for a Roth IRA before we get into the details.
|
If you are . . . |
And you’ve held your Roth IRA for . . . |
You can withdraw . . . |
|
Under Age 59½ |
Less than 5 years |
Contributions (without taxes or penalty) Earnings (subject to taxes and a 10% penalty) |
|
Older than 59 1/2 |
5 years or longer |
Contributions and earnings (without taxes or penalties) |
|
Older than 59 1/2 |
Less than 5 years |
Contributions (without taxes or penalty) Earnings (subject to taxes)8 |
Early Withdrawal Rules
You can withdraw your original contributions at any time without owing any taxes or penalties, even before retirement. And that’s because you’ve already paid taxes on those contributions.
But if you want to withdraw more than your contributions, a.k.a. dipping into your growth, you’ll have to pay income taxes and the 10% early withdrawal penalty on those earnings.
Uncle Sam does make a few exceptions to paying taxes and fees on those early earnings withdrawals. They include:
- You use that money to pay for education expenses
- You use that money (up to $10,000) to buy your first home
- You use that money to pay for adoption or birth expenses
- You become disabled or pass away
- You use the money to pay for unreimbursed medical expenses or health insurance premiums while unemployed9
But hold the phone—if you’re using a Roth IRA to build your retirement savings, the last thing you want to do is withdraw your contributions before retirement! Even if you won’t be taxed or penalized for it. You want that money to stay right where it is, growing with compound interest year after year.
The Five-Year Rule
If you’re older than age 59 1/2 and your Roth IRA has been open at least five years, you can withdraw money (contributions and growth) from your Roth IRA tax- and penalty-free. Sweet!
But if it’s been fewer than five years since you opened your Roth IRA, you will be subject to taxes on any earnings you withdraw.10
Roth IRA Beneficiary Rules
The rules for Roth IRA beneficiaries revolve around two factors: the beneficiary’s relationship to the original owner and the age of the Roth IRA account.
Before the SECURE Act was passed in 2019, any beneficiary, no matter what their relationship was to the original owner, could leave that money in the Roth IRA for as long as they wanted. No required minimum distributions (RMDs) to worry about.
But now only certain qualified beneficiaries can leave inherited funds in a Roth IRA for longer than 10 years after the original owner’s death:
- Spouse of the original owner
- Minor children of the original owner
- Anyone disabled or chronically ill
- Anyone not more than 10 years younger than the original owner (like a younger sister or brother)11
Any beneficiary who doesn’t meet these qualifications has to withdraw all funds within 10 years of the original owner’s death.12 So, what if your beneficiary is younger than 59 1/2? Will they be penalized for early withdrawal? No. That’s the good news.
The not-so-good news is, if your beneficiary takes a withdrawal from your Roth IRA and you had held that Roth IRA for less than five years, then the earnings will be subject to tax.13 That’s the five-year rule we discussed earlier coming back into play.
How to Open a Roth IRA
Now that we’ve gone over the nitty-gritty details, let’s get down to the practical stuff.
The best way to open a Roth IRA is with the help of an investment professional who will meet with you face to face. Before you meet with your investment pro, you’ll need to gather some information and fill out the application. Here’s what you’ll need:
- Your driver’s license or other form of photo identification
- Your Social Security number
- Your bank’s routing number and your checking or savings account number
- Your employer’s name and address
As part of the process of starting a Roth IRA, you’ll also choose a beneficiary (or beneficiaries) who will inherit your account if something happens to you. You’ll need their name, Social Security number and date of birth.
Next, just add money! You can open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month. You can actually do both as long as you don’t go over the contribution limit for that year.
Get Started on a Roth IRA Today!
Opening a Roth IRA is as easy as opening a checking account. The best way to get started is to contact an investment professional who can guide you through the set-up process.
If you don’t have a financial professional, reach out to a SmartVestor Pro in your area. They’re committed to educating and empowering you to make the best decisions possible for your retirement future.
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Ramsey Solutions is a paid, non-client promoter of participating pros.
Frequently Asked Questions
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Is a Roth IRA the same thing as a Roth 401(k)?
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Nope, a Roth IRA and a Roth 401(k) are not the same. But your contributions to both accounts are taxed the same way. Adding the word Roth to the name of either savings plan means the money you contribute will be taxed up front, grows tax-free, and can be withdrawn tax-free after age 59 1/2.
But there are a couple big differences between the two plans that we have to talk about. First, you can contribute a lot more to a Roth 401(k) each year than an IRA (about three times more for most people).
Second, Roth 401(k) plans are sponsored by employers. Most companies offer an employer match on your Roth 401(k)—which is great news for you! But keep in mind, the match is not tax-favored. That means the growth from your employer’s match will be taxed when you withdraw your funds in retirement.
If your job offers you a Roth 401(k) with a match, take it! You can contribute to both a Roth IRA and a Roth 401(k) at the same time.
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How much money do you need to start a Roth IRA?
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The great thing about Roth IRAs is that you don’t need to invest a ton of money to open an account. In fact, the IRS doesn’t require a minimum amount to open a Roth IRA. Most mutual fund companies require an account minimum to open one, but you can start a Roth IRA with as little as $50 in most cases.
That means there’s no need to put off investing, people! Once you’re out of debt with a fully funded emergency fund, you can dive right in and start investing 15% of your income for retirement.
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What should my Roth IRA be invested in?
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You can invest in almost anything through your Roth IRA, but we recommend mutual funds because they have the highest potential for helping you build wealth over time—especially with a Roth IRA’s tax benefits.
If you feel lost when it comes to picking mutual funds, an investment professional can help you find good growth stock mutual funds with a history of strong returns.
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Can I set up a Roth IRA for my spouse who doesn't work?
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Yes, your spouse who doesn’t work can open a Roth IRA. If you file a joint income tax return and at least one of you has taxable income, you can both contribute to your own separate Roth IRAs. But the IRS income-eligibility limits still apply.
Let’s say 40-year-old John makes $150,000 and his wife, Kate, stays home with their kids. John can put up to $6,500 in his IRA. And Kate can open a spousal IRA in her name and contribute the maximum amount of $6,500 as well.
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Can you lose money in a Roth IRA?
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The short answer is yes. There’s always an element of risk when you invest, but you can minimize your risk by spreading out your investments evenly across four different types of mutual funds: growth and income, growth, aggressive growth, and international. That way, you’ll balance and diversify your portfolio between higher-risk investments and more steady and predictable ones.
And listen, if the market has a bad day, don’t panic and take all your money out of the investments in your Roth IRA. That’s the worst thing you can do because all you’re doing is locking in your losses. And if you actually withdraw all the money from your Roth IRA, you’ll get hit with a slew of taxes and penalties if you’re under age 59 1/2.
Don’t do it!
Investing in the stock market is like riding a roller coaster—the only people who get hurt are the ones who jump off. The investors who keep their cool and give their money time to grow are the ones who get to the end of the ride safe and sound. When in doubt, reach out to an investment pro for guidance!
This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.
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