A Roth IRA lets you save money for retirement in a tax-free account

A Roth IRA is a retirement savings account where you contribute money that has already been taxed, and then the money grows without being taxed again. When you withdraw money in retirement — after age 59½ — you pay no tax on the growth or the original contributions. This is different from a traditional IRA, where contributions may be tax-deductible now but withdrawals in retirement are taxed as income.

The trade-off is straightforward: you pay taxes on the money before it goes in, but you never pay taxes on it again. If you believe your tax rate will be higher in retirement than it is now, a Roth IRA can save you money over decades. If you expect to be in a lower tax bracket later, a traditional IRA might be the better choice.

You can open a Roth IRA through most banks, brokerages, and investment firms. There are no required withdrawals during your lifetime, which means the account can keep growing as long as you live. You can also withdraw your own contributions (not the earnings) at any time without penalty, which gives you some flexibility that other retirement accounts do not offer.

Key Takeaways

  • A Roth IRA is funded with after-tax money, but withdrawals in retirement are completely tax-free.
  • You can contribute up to $7,000 per year (or $8,000 if you are 50 or older), but only if your income is below certain limits that vary by filing status.
  • Unlike a traditional IRA, you can withdraw your contributions anytime without penalty, though earnings must stay until age 59½.
  • A Roth IRA makes the most sense if you expect to be in a higher tax bracket in retirement or want tax-free growth over many decades.
  • You can open one through any major bank or brokerage and choose how to invest the money inside it.

Income limits determine whether you can contribute

Not everyone can contribute to a Roth IRA. The IRS sets income limits that change each year. For 2024, if you file as single, you can contribute the full amount if your modified adjusted gross income is below $146,000. If your income is between $146,000 and $161,000, you can contribute a reduced amount. Above $161,000, you cannot contribute at all.

If you are married and file jointly, the limits are higher: you can contribute fully if your income is below $230,000, contribute a reduced amount between $230,000 and $240,000, and cannot contribute above $240,000. These numbers shift each year, so check the IRS website or your brokerage before you open an account.

If your income exceeds the limit, you have other options. Some people use a "backdoor Roth" strategy, which involves contributing to a traditional IRA and then converting it to a Roth, though this has tax complications and works best with professional guidance. Others straightforward use a traditional IRA or a workplace retirement plan instead.

How much you can contribute each year

For 2024, you can contribute up to $7,000 per year to a Roth IRA if you are under 50. If you are 50 or older, you can contribute an extra $1,000 per year, for a total of $8,000. These limits explore to all your IRAs combined — if you have both a Roth and a traditional IRA, your contributions to both cannot exceed the annual limit.

You do not have to contribute the full amount every year. You can contribute $2,000 one year and $5,000 the next. You can also skip a year entirely if you need to. The only requirement is that you have earned income (from a job or self-employment) in the year you contribute. You cannot fund a Roth IRA with investment returns, gifts, or inheritance.

The contribution important date is usually April 15 of the following year. If you miss the important date, you can still contribute for that year until the tax filing important date, but you cannot go back further than that.

When you can withdraw money without penalty

Your contributions to a Roth IRA can be withdrawn anytime, tax-free and penalty-free. This is one of the biggest advantages over a traditional IRA. If you contribute $5,000 and it grows to $6,000, you can pull out the original $5,000 whenever you need it without any consequences.

The earnings (the $1,000 of growth in that example) are a different story. You cannot withdraw earnings before age 59½ without paying income tax on them plus a 10% penalty — unless you meet a narrow exception. The main exceptions are disability, medical expenses over 7.5% of your income, or a first-time home purchase (up to $10,000 lifetime). Some people use this feature as an emergency fund, but it is not the intended purpose.

After age 59½, you can withdraw as much as you want, whenever you want, with no tax or penalty. There is no required minimum withdrawal age, which means you can let the money keep growing for as long as you live if you do not need it.

How to choose investments inside your Roth IRA

When you open a Roth IRA, you are opening a container. What you put inside it is up to you. Most brokerages let you choose from stocks, bonds, mutual funds, exchange-traded funds (ETFs), or a mix of all of them. Some people pick individual stocks; others buy a single broad index fund and leave it alone.

The brokerage you choose determines what investments are available to you. Some firms offer thousands of options; others offer a smaller menu. If you are new to investing, many brokerages offer target-date funds, which automatically shift from stocks to bonds as you get closer to retirement. These require almost no decision-making on your part.

The money inside your Roth IRA grows tax-free no matter what you invest in, so the focus should be on picking investments that match your risk tolerance and time horizon, not on tax efficiency. If you are decades away from retirement, you can afford to take more risk. If you are close to retirement, you might want more stable investments.

Roth IRA versus traditional IRA: which makes more sense

The main difference is when you pay taxes. With a Roth, you pay taxes now and withdraw tax-free later. With a traditional IRA, you may deduct contributions now (lowering your current taxes) and pay taxes on withdrawals later. If you are in a high tax bracket now and expect to be in a lower one in retirement, a traditional IRA saves you more money. If you are in a low bracket now and expect to be in a higher one later, a Roth is better.

A Roth IRA also has advantages beyond taxes. You can withdraw contributions anytime. There are no required withdrawals in retirement. You can leave it to heirs, and they can withdraw the earnings tax-free (though they must follow specific rules). A traditional IRA forces you to start withdrawing at age 73, whether you need the money or not.

If you have access to a workplace 401(k) or 403(b), you might use both: max out the workplace plan first (especially if your employer matches), then fund a Roth IRA with whatever money is left. The two accounts work together, not against each other.

Where to open a Roth IRA and what to expect

You can open a Roth IRA at any major bank, brokerage, or investment firm. Common choices include Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge, but credit unions and smaller brokerages offer them too. The process takes 10 to 20 minutes online. You will need your Social Security number, date of birth, address, and employment information.

Once the account is open, you transfer money into it (usually by linking a bank account) and then choose your investments. Some people fund it all at once; others set up automatic monthly contributions. There are no fees to open or maintain the account at most firms, though some charge a small annual fee if your balance is very low.

After you contribute, you will receive a confirmation and a statement showing your balance. You can log in anytime to see how your investments are performing, make changes, or add more money. The account is yours to manage, and you can move it to a different brokerage later if you want to.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can have both. However, your total contributions to all IRAs combined cannot exceed the annual limit ($7,000 for 2024, or $8,000 if you are 50 or older). If you contribute $4,000 to a Roth, you can only contribute $3,000 to a traditional IRA that year.

What happens to my Roth IRA if I change jobs?

Your Roth IRA is yours and does not change when you change jobs. It is separate from any workplace retirement plan. You can keep contributing to it as long as you have earned income and your income is below the limit, regardless of where you work.

Can I withdraw money from my Roth IRA to buy a house?

You can withdraw your contributions anytime without penalty. If you are a first-time homebuyer, you can also withdraw up to $10,000 of earnings (lifetime limit) without the 10% penalty, though you will owe income tax on the earnings. You must use the money within 120 days of withdrawal.

What if I do not have earned income — can I still open a Roth IRA?

No. You must have earned income from a job or self-employment in the year you contribute. If you are married and your spouse works, your spouse can open a spousal IRA in your name, but you still need earned income to fund it.

Do I have to invest the money in my Roth IRA, or can I leave it in cash?

You can leave it in cash if you want, though it will not grow. Most brokerages offer a money market fund or savings option that earns a small amount of interest. For long-term retirement savings, most people invest the money so it has time to grow.