What Are Roth IRA Accounts?

A Roth IRA is an individual retirement account where you put after-tax dollars and enjoy tax-free-growth and withdrawals. The main benefit of a Roth IRA is that unlike a traditional IRA, you can make withdrawals without paying taxes on your contributions and earnings once you retire.

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How does a Roth IRA work?

You take after-tax dollars, which is money you’ve already paid federal, state and withholding taxes on, and put them into your Roth account. You then choose your investments. Any interest gained on your investments grows tax-free. Because you already paid taxes on the money before putting it into your IRA, your withdrawals during retirement are tax-free, too. That is, as long as you wait until 59 ½ and have had the account open for five years counting from the tax year of your first contribution or more.

If you choose to withdraw earnings from your Roth IRA earlier than age 59 ½, you may be subject to income taxes and penalties. There are some exceptions to this rule which include:

  • Withdrawing up to $10,000 to buy your first home.

  • Qualified education expenses.

  • Health insurance premiums while unemployed.

  • Disability related expenses.

  • You’re withdrawing up to $5,000 a year after having a baby or adopting.

You can open a Roth IRA, as long as you meet the income limits (in the table below), and have income from work (the IRS term is “taxable compensation”).

Maximum annual contribution

Single, head of household or married filing separately (if you didn’t live with spouse during year)

$6,000 ($7,000 if 50 or older)

Married filing jointly or qualifying widow(er)

$6,000 ($7,000 if 50 or older)

Married filing separately (if you lived with spouse at any time during year)

If you don’t qualify for a Roth IRA, you have the option of contributing to a Roth through the backdoor Roth method also known as a Roth conversion. This type of conversion allows you to transfer money from your traditional IRA or 401(k) into a Roth, but you have to pay taxes on the money first. There are no restrictions on income limits or marital status for backdoor Roths, so anyone is eligible to do one.

Read our IRA limits page for more details on Roth IRA income limits and the exceptions to them.

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 other retirement accounts, such as a traditional IRA. The reason is, 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.

However, think about rising inflation. Inflation erodes the value of money over time. If you pay taxes now, you won’t have to pay them in retirement, when taxes may be higher.

  • No required minimum distributions: Account holders of Roth IRAs aren’t subject to the required minimum distributions required from a traditional IRA or 401(k) starting at age 72.

  • No income tax on inherited Roth IRAs: If you pass a Roth IRA to a heir, they enjoy tax-free withdrawals as long as the account was held for at least five years at the time of the account holder’s death.

  • Easy withdrawals: You can withdraw the money you contributed any time, without taxes or penalty. (You may be taxed or penalized if you withdraw investment earnings.)

  • Double dipping: You can contribute to a Roth in addition to a 401(k).

  • Flexible timing: You can choose when and how much you contribute to a Roth IRA. For example, you could contribute $6,000 on the first day of the year, or split up your contributions over many months.

  • Extra time to contribute: You have until that year’s tax deadline to contribute for the previous calendar year.

  • Tax-free distributions: Once you hit 59½ and have held the account for at least five years, you can take distributions, including earnings, from a Roth IRA without paying federal taxes.

  • No age limit to open: You can open a Roth IRA at any age, as long as you have earned income (you can’t contribute more than your earned income).

For the sake of a balanced view, consider potential  drawbacks of a Roth IRA, too.

  • 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 them 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, which you can see in the table above.


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Choosing your Roth IRA investments

You’ve decided you want to open a Roth IRA, now what? There are several types of securities you could invest in using your Roth, including:

Roth IRA vs. traditional IRA

If you’re wondering the main difference between a Roth IRA and traditional IRA, it’s in how they’re taxed. Roth IRAs give you tax-free withdrawals after retirement while traditional IRAs give you a tax break beforehand. So, if you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, Roth IRAs are a good idea.

Here are a few withdrawal and distribution rules you must follow:

  • 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.

  • 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.

  • People at least 59½ years old and who hold their accounts for at least five years can take distributions, including earnings, without paying federal taxes.

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