Andrea Coombes has been writing and speaking about personal finance for almost two decades. Her stories have appeared in the Wall Street Journal, MarketWatch, the Miami Herald, the San Francisco Chronicle and elsewhere. Find her on Twitter: @andreaco.
Andrea Coombes ContributorAndrea Coombes has been writing and speaking about personal finance for almost two decades. Her stories have appeared in the Wall Street Journal, MarketWatch, the Miami Herald, the San Francisco Chronicle and elsewhere. Find her on Twitter: @andreaco.
Written By Andrea Coombes ContributorAndrea Coombes has been writing and speaking about personal finance for almost two decades. Her stories have appeared in the Wall Street Journal, MarketWatch, the Miami Herald, the San Francisco Chronicle and elsewhere. Find her on Twitter: @andreaco.
Andrea Coombes ContributorAndrea Coombes has been writing and speaking about personal finance for almost two decades. Her stories have appeared in the Wall Street Journal, MarketWatch, the Miami Herald, the San Francisco Chronicle and elsewhere. Find her on Twitter: @andreaco.
ContributorBen is the Retirement and Investing Editor for Forbes Advisor. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for B.
Ben is the Retirement and Investing Editor for Forbes Advisor. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for B.
Ben is the Retirement and Investing Editor for Forbes Advisor. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for B.
Ben is the Retirement and Investing Editor for Forbes Advisor. With two decades of business and finance journalism experience, Ben has covered breaking market news, written on equity markets for Investopedia, and edited personal finance content for B.
Updated: Nov 1, 2023, 3:40pm
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
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A Roth IRA is a type of investment account that can provide you with tax-free income in retirement. You contribute after-tax dollars to a Roth IRA—in return, withdrawals in retirement are not taxed.
Roth IRAs provide additional flexibility for tax-free early withdrawals before you reach retirement age, but there are income limitations on who can contribute to this unique retirement account. Here’s everything you need to know about the Roth IRA.
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On Datalign Advisory's WebsiteA Roth IRA is a type of individual retirement account (IRA) that holds investments to provide you with income in retirement.
The money you contribute to a Roth IRA comes from earned income after you’ve paid income taxes. Unlike with a traditional IRA, there’s no upfront tax break. Instead, the tax benefits come later since you owe no income tax on qualified withdrawals.
You can open a Roth IRA with an online brokerage account, a robo-advisor, a bank or a credit union.
If you choose an online broker, funds can be used to purchase stocks, bonds, mutual funds and exchange-traded funds (ETFs). If you choose a credit union or a bank, you can place Roth contributions in a savings account or a certificate of deposit (CD).
Using a self-directed IRA, you can invest in alternative assets like cryptocurrencies, gold and real estate.
You can withdraw contributions you’ve made to a Roth IRA without paying a penalty or income tax, but you can only withdraw earnings from your account within a certain time frame.
If you withdraw your earnings within five years of having made your first Roth IRA contribution and you’re younger than 59½, you owe income taxes and a 10% early withdrawal penalty. There are a few exceptions, like a first-time home purchase—more on those below.
Once you turn 59½ and your Roth IRA account has been open for at least five years, you may withdraw earnings free of income taxes or penalties, for any reason.
Anyone who earns an income and doesn’t exceed certain income thresholds can contribute to a Roth IRA.
You must have earned “taxable compensation” for the year, meaning money from a job or self-employment, to save in a Roth IRA.
If you don’t make a taxable compensation but file a joint tax return with a spouse who does, you may be eligible to contribute to a spousal IRA.
Single, head of household or married filing separately (and you did not live with your spouse at any time during the year)
Less than $138,000 Less than $146,000 Up to the annual limitSingle, head of household or married filing separately (and you did not live with your spouse at any time during the year)
$138,000 to $153,000 $146,000 to $161,000 A reduced amountSingle, head of household or married filing separately (and you did not live with your spouse at any time during the year)
More than $153,000 More than $161,000 Married filing jointly or qualified widow(er) Less than $218,000 Less than $230,000 Up to the annual limit Married filing jointly or qualified widow(er) $218,000 to $228,000 $230,000 to $240,000 A reduced amount Married filing jointly or qualified widow(er) More than $228,000 More than $240,000 Married filing separately Less than $10,000 Less than $10,000 A reduced amount Married filing separately More than $10,000 More than $10,000 See More See LessIf you do not earn income but are married and file a joint return with an income-earning spouse, you may qualify for a spousal Roth IRA.
This type of IRA lets each spouse open their own account and contribute full amounts up to the current annual limit, as long as the total combined contributions aren’t more than the taxable compensation they report on their joint return.
Spousal IRAs follow the same rules and contribution limits as other IRAs. Each spouse owns their IRA individually, but they are not co-owned.
The contribution limits for your traditional as well as IRA accounts in 2024 is $7,000. Savers who are 50 or older may contribute an additional $1,000. In 2023, the annual contribution limit was $6,500, or $7,500 if you were 50 or older. You cannot contribute more than you receive in earned income each tax year.
Remember that the annual contribution limit caps all your IRA contributions cumulatively. That means if you own a Roth IRA and a traditional IRA, your total combined contributions to all accounts are limited to the annual cap. Your contributions to both can add up to no more than $6,500 in 2023 and $7,000, before any catchup contributions. You can’t contribute the basic cap amount to both.
The IRS charges a 6% tax on excess IRA contributions. To avoid being charged, you must withdraw the excess contributions from your IRA by the due date of your income tax return and any income earned on the excess contributions.
You can open a Roth IRA using the following options:
Five years is a key measure of time when you own a Roth IRA account. As noted above, contributions can be withdrawn from your Roth IRA at any time and for any reason, free of fees or taxes.
In most cases, you must wait five years after your first contribution to make penalty- and tax-free withdrawals of earnings from your Roth IRA account.
The five-year clock starts on Jan. 1, the year you first put money into your Roth IRA. The five-year rule also applies to Roth conversions, with the waiting period starting on the first day of the tax year when you made the conversion.
Some additional factors to consider concerning the Roth IRA five-year rule are:
In some cases, you may be able to take penalty-free withdrawals from your Roth IRA, even if it’s been less than five years since you made your first contribution. The exceptions include some of the following for being under age 59 ½:
Remember, although you might avoid the penalty for early withdrawals in the cases above, you will still owe taxes on earnings under these early withdrawal exceptions.
Traditional IRA contributions reduce your taxable income if an employer-sponsored retirement plan does not cover you. This means a traditional IRA may be a better choice for your retirement savings if you expect your income taxes to be higher now than in retirement.
If an employer-sponsored retirement plan covers you, a relatively low-income ceiling will make you ineligible for the traditional IRA tax deduction.
If your income is above the range that applies to the situation above, a Roth IRA is worth considering. Remember, however, that your income must also remain under the thresholds we covered earlier to be eligible to contribute to a Roth IRA.
If it exceeds that ceiling, you may want to consider contributing to a nondeductible traditional IRA that you can later convert into a Roth IRA. This is called a backdoor Roth IRA, which is detailed below.
One major difference between Roth IRAs vs. traditional IRAs is that Roth IRAs have no required minimum distributions (RMDs).
By April 1 of the year after you turn 72 and by December 31 of all subsequent years, you must start withdrawing funds from a traditional IRA. The starting age is 73 if you reach age 72 after December 31, 2022.
There are no RMDs with Roth IRAs. In fact, you can leave the money completely untouched while you are alive and bequeath the entire account balance to your heirs if you wish.
But if you inherit a Roth IRA, you must take RMDs from the account. Generally, you must withdraw all funds from the account within 10 years, although there are exceptions for spouses and some other beneficiaries.
Roth IRAs have a few key advantages. Here are ones they share with traditional IRAs:
Roth IRAs have a few unique advantages as well:
A backdoor Roth IRA is a strategy available to people whose annual income would ordinarily disqualify them from making regular Roth IRA contributions.
If your annual income exceeds the Roth IRA thresholds outlined above, a backdoor Roth IRA provides a workaround that lets you deposit money. Here’s a basic view of how a backdoor Roth IRA conversion works:
Rolling funds over from a current 401(k) retirement account is another way to create a backdoor Roth IRA, but you wouldn’t want to do this with an account you’re currently using as your main source of retirement funding.
Backdoor Roth IRA conversions are not simple and involve somewhat complicated maneuvers. While it’s not impossible to do a backdoor Roth conversion yourself, we recommend that you consult with an experienced financial advisor.
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