The Complete Guide to Roth IRAs

Putting money toward retirement accounts is a worthy endeavor, as it’ll set you up to enjoy your golden years. The good and not so good news is that there are many options when it comes to accounts you can open. For those who want tax-free growth and withdrawals (as long as you meet the requirements), a Roth IRA may be a good choice. As with all types of investments, there are benefits to a Roth IRA as well as downfalls. Before opening one, take the time to learn the ins and outs of this retirement account, and talk to a financial professional.

What Is A Roth IRA? 

A Roth IRA is a type of individual retirement account where you contribute post-tax dollars. Your contributions grow tax free, and withdrawals are not taxed as income, as long as you meet the qualifying requirements. With some exceptions, you need to be at least 59.5 years of age or have had the Roth IRA account for at least 5 years in order to avoid taxes and penalties on earnings.  

Roth IRA Vs. Traditional IRA

A Roth IRA and Traditional IRA differ in the ways your contributions and earnings are taxed. Whereas Roth IRA contributions are used with money that’s already taxed, contributions to Traditional IRA accounts are made pre-tax. For both accounts, earnings are tax-free when growing in your IRA. 

Withdrawals from Traditional IRAs are considered taxable, even if you take distributions after 59.5 years old. Like Roth IRAs, any amount you withdraw before you reach age 59.5 may be subject to penalties. Account holders of Traditional IRA accounts are also required to take required minimum distributions (RMDs) once they reach 72 years of age. Roth IRA account holders don’t have the same requirement.

Roth IRA Vs. 401(k)

A Roth IRA and 401(k) are both retirement accounts, though that’s where the similarities end. 401(k)s are a type of employer-sponsored retirement account, whereas most U.S. citizens and residents can open an IRA account on their own. Employers may also match the contributions you make, typically up to a certain percentage. Contribution limits are also higher for 401(k)s — $22,500 in 2023 and $23,000 in 2024. 

How Does A Roth IRA Work?

A Roth IRA is where you make contributions up to your allotted maximum amount each year and they grow tax free in your allotted investments. Depending on your brokerage, investment options and fees will differ. You can contribute more to your Roth IRA — called catch-up contributions — if you’re 50 years or older. You can take distributions tax free as long as you meet the qualifying criteria. 

Roth IRA Contributions

The contributions for Roth IRAs are $6,500 ($7,500 if you're 50 or older) in 2023 and $7,000 ($8,000 for those aged 50 and up) in 2024. If you and your spouse want to contribute to a Roth IRA, you can each contribute up to the limit. However, if you are over a certain income — a modified adjusted gross income of $147,500 or higher for individuals and $231,000 for married couples in 2024 — your maximum contribution amount will be lower. For those who have high incomes, you may be phased out of being able to make Roth IRA contributions. 

Roth IRA Withdrawals

When taking distributions, you won’t pay taxes as long as you’re at least 59.5 years old or have had the account for a minimum of five years. Your withdrawals may be subject to taxes and a 10% early withdrawal penalty if you’re under 59.5 years old and/or take money out before you have the account open for five years. While withdrawals are tax free if you’ve had the account open for at least 5 years, you may still be responsible for paying a 10% penalty if you’re under 59.5 years old. 

There are some exceptions, like if you used the funds to purchase your first home, for expenses related to a birth or adoption, or for qualified education expenses. Speak with a reputable financial advisor or check the IRS website to see what exceptions you may qualify for. 

Roth IRA Conversions

Even if you can't contribute to a Roth IRA account directly, you can get around this by converting a Traditional IRA into one. Or, if you have a 401(k) that allows you to do so, you may be able to convert some of the funds there into a Roth IRA. 

To enable a Roth IRA conversion, first open a traditional IRA account and put in some funds. Once you meet the required waiting period, contact your brokerage company to convert it to a Roth IRA. Your contributions and any earnings you receive at the time of the conversion will be subject to taxes. 

Roth IRA conversions aren’t for everyone, especially if you can contribute to a Roth IRA directly. It also may not make sense if you intend on withdrawing any amount within 5 years — you may be better off leaving it in a Traditional IRA. 

Who Is Eligible For A Roth IRA? 

While anyone can open a Roth IRA, only those within certain income thresholds can contribute to one. Your current income may also limit your contributions to less than the maximum amount, or $7,000 in 2024. 

Roth IRA Income Limits

According to the IRS, if your modified adjusted gross income (MAGI) is $153,000 or over for individuals, and $228,000 for couples filing jointly, you cannot contribute. There are phase out contribution amounts if you earn above $138,00 as an individual or $218,000 as a married couple filing jointly. Though you can still contribute if you earn these amounts, your contribution limits are lower and go down as your MAGI goes up. You can consider setting up a backdoor Roth IRA if your MAGI is over the income limits. 

Benefits Of A Roth IRA

Roth IRA accounts offer numerous benefits, including tax advantages and its flexibility: 

• Tax-free withdrawals: You have the benefit of not paying taxes on withdrawals, as long as you meet the five-year rule and are at least 59.5 years old. Or, you can meet one of the exceptions stipulated by the IRS.
• No RMDs: You’re not required to make minimum withdrawals once you reach 72 years old, unlike other types of retirement accounts. 
• Catch up contributions: Those who are at least 50 years old have the ability to contribute up to an extra $1,000 a month. 

How To Start A Roth IRA

Though specifics may vary based on which brokerage you go with, opening a Roth IRA account generally follows these steps:

• Choose a brokerage (consider factors like investment options, customer service and fees)
• Provide necessary documentation to open an account
• Fund your account (you may contribute up to your annual limit at once or over time)

• Choose your investments for your Roth IRA portfolio (like mutual funds, stocks, bonds and exchange-traded funds)

Roth IRA FAQs

How much money do I need to start a Roth IRA?

The amount you’ll need to start a Roth IRA account will depend on the brokerage. Most, though, don’t have a minimum to open an account, though there may be minimums depending on the investments you want to purchase within the Roth IRA.

How many Roth IRAs can I have?

You can have as many Roth IRAs as you want, though you can only contribute up to the annual limit across all your accounts. 

When should I open a Roth IRA?

You can open a Roth IRA at any time, though opening one when you are younger (and contributing regularly to it) will give you the advantage of earnings through compound interest.

What is the 5-year rule for Roth IRAs?

The 5-year rule stipulates that you need to have your Roth IRA open for at least 5 years before you’re allowed to take tax-free withdrawals. 

Do Roth IRAs have required minimum distributions?

No, Roth IRAs don't have required minimum distributions (RMDs).

The Bottom Line: A Roth IRA Offers A Flexible Way To Save for Retirement

Roth IRAs give you the opportunity to grow your money tax free. Withdrawals are also tax-free as long as you meet the requirements. It makes it a great choice for those who prefer not to pay taxes (or as little as possible) during their retirement years. 

Tracking your retirement accounts is only part of one way to assess your financial health. Consider other actions like tracking your current spending and savings, and finding ways to increase your retirement contributions if it makes sense to do so. Taking advantage of free apps like Rocket Money^SM can help track all your retirement savings and spending in one place.