What Is a Roth IRA?
A Roth IRA is a type of individual retirement account that allows tax-free growth and withdrawals. But you pay income tax on your contributions into it. You can start making income tax-free withdrawals from a Roth IRA six months after your 59th birthday and have had your account for five years.
- Written by Terry Turner
Terry Turner
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Terry Turner has more than 35 years of journalism experience, including covering benefits, spending and congressional action on federal programs such as Social Security and Medicare. He is a Certified Financial Wellness Facilitator through the National Wellness Institute and the Foundation for Financial Wellness and a member of the Association for Financial Counseling & Planning Education (AFCPE®).
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Read More- Published: September 8, 2020
- Updated: November 7, 2023
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How Does a Roth IRA Work?
You contribute money to your Roth IRA to grow your investments. These contributions are limited to a maximum amount each year and are not tax deductible like traditional IRA contributions. But your withdrawals are free from federal income taxes. You also don’t have to pay taxes on the growth of your investments.
You have to meet certain qualifications to open a Roth IRA.
First, you have to have “earned income” — income you received from working rather than investment income, Social Security benefits, child support or other nonwork-related sources.
Next, you have to be under the income limit allowed for enrolling in a Roth IRA.
How Much Can You Contribute to a Roth IRA?
How much you can contribute to a Roth IRA each year is based on your income tax filing status and your modified adjusted gross income (MAGI). Your MAGI is your household income plus any tax-exempt interest income and certain other deductions you claimed on your tax return.
The maximum limit you can contribute for 2024 is $7,000 if you are younger than 50 and an extra $1,000 catch-up contribution if you are 50 or older.
There is an income limit — called a phase-out range — that limits how much you can contribute to a Roth IRA. For single filers, the phase-out range is $146,000 to $161,000 and for joint filers it’s $230,000 to $240,000 in 2024.
If your income is within that range, your maximum contributions are reduced. If you income exceeds the higher income in the range, you can not contribute any money to a Roth IRA.
The deadline for making an annual contribution is the same as for filing deadline for your taxes.
How to Open a Roth IRA
Like a traditional IRA, you have to open a Roth IRA on your own through a financial institution or a licensed financial professional.
- Banks
- Banks offer more security for your IRA but your investment growth may be limited. Most bank Roth IRAs tend to be tied to certificates of deposit which typically provide a lower return on investment than other options.
- Brokerage Firms (Including Online Brokers)
- Online brokers and other firms allow you to invest in stocks, bonds and mutual funds. These typically provide a greater return on investment so your Roth IRA may grow more quickly. But these may also prove more volatile than an IRA through a bank.
- Robo-Advisers
- These services, often provided by major investment institutions, can help you select the best investments based on your goals and timeline for retirement along with your current income.
If you are unsure of the best route for your retirement investment plan, it may be helpful to discuss your options with a licensed professional financial advisor.
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Rules for Roth IRA Distribution and Withdrawal
You can take money out of your Roth IRA at any time without having to pay income taxes on the withdrawal. But you may have to pay an early withdrawal penalty or pay taxes on your Roth IRA’s earnings if you don’t meet certain rules.
- Withdrawals are made six months after you turn 59
- You must have had the Roth IRA account for at least five years
- Your withdrawal meets a legal exception under the law
There are some exceptions that allow you to withdraw money early and still avoid penalties and taxes on earnings. These can apply if you are not yet 59 and six months or have not had your Roth IRA for five years.
- A beneficiary withdraws money after your death
- First-time home purchase — up to $10,000 over your lifetime
- Paying for health insurance premiums if you are unemployed
- Paying for unreimbursed medical expenses if you are unemployed
- Used for qualified birth or adoption expenses
- Used for qualified education costs
- You become disabled
Benefits and Advantages of Roth IRAs
Roth and traditional IRAs are the most common types of individual retirement accounts. Both offer tax advantages, but their benefits vary from one another.
- There’s no age limit for opening a Roth IRA as long as you have earned income to invest.
- Unlike a traditional IRA, Roth IRAs have no required minimum distributions — a minimum amount you have to withdraw every year.
- You can avoid all federal taxes on your money if you have a Roth IRA for at least five years and are 59 and six months or older.
- You can make your annual contributions in a lump sum or spread throughout the year.
- You can withdraw your money at any time without having to pay income taxes or penalties — but you may have to pay taxes on earnings.
- You have until the April 15 tax deadline to make contributions for the previous year.
Alternatives to Roth IRAs
Roth IRAs are one of the four main types of individual retirement accounts available for retirement planning. The other types are traditional IRAs, SEP IRAs and SIMPLE IRAs.
Choosing the one that’s best for you may depend on your income level and where and how you are employed.
- Traditional IRA
- Traditional and Roth IRAs are somewhat similar. The biggest difference is in the type of tax advantage you receive from investing. The biggest difference may be that a traditional IRA allows you to take advantage of tax breaks as you contribute to your retirement account, while a Roth IRA allows for tax-free withdrawals in the future.
- SEP IRA
- Employers or self-employed workers are allowed to set up SEP (Simplified Employee Pension) IRAs. These are similar to a traditional IRAs but it allows employer contributions and gives employers a tax deduction for those contributions.
- SIMPLE IRA
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs provide a retirement savings plan for small businesses with 100 or fewer workers. Employees can contribute a maximum of $16,000 in 2024. Their employer can either make a minimum 2 percent contribution or can contribute up to an optional 3 percent.
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4 Cited Research Articles
- U.S. Internal Revenue Service. (2020, January 28). Traditional and Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-and-roth-iras
- U.S. Internal Revenue Service. (2020, January 10). Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/roth-iras
- U.S. Internal Revenue Service. (2020, January 9). Individual Retirement Arrangements (IRAs). Retrieved from https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
- Cornell Law School. (n.d.). 26 U.S. Code Section 408 - Individual Retirement Accounts. Retrieved from https://www.law.cornell.edu/uscode/text/26/408
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