What Is a Roth IRA?

Amanda Claypool

Writer

A Roth IRA is a type of retirement account that can help you grow your money while reducing the taxes you’ll pay later in life. You make after-tax contributions now and can withdraw tax-free in retirement.

If you’re considering opening an IRA there are a few things you’ll want to know first. Let’s dive into what Roth IRAs are, how they work, and whether or not it’s an account that will work for you. 

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  • Roth IRAs are a type of tax-benefited retirement account that allows you to save for retirement.
  • Contributions to Roth IRAs are not tax deductible, but withdrawals in retirement are tax-free.
  • There are income limits restricting high-income earners from contributing to a Roth IRA
  • The maximum contribution for individuals under the age of 50 in 2023 is $6,500 (and $7,500 for individuals over 50)
  • You can contribute fully to both a Roth IRA and a 401(k).

What is a Roth IRA?

An IRA — or individual retirement account — is an investment account you can use to save for retirement. You can contribute in addition to a traditional IRA or your company’s 401(k).

The IRA is a label that is put on an investment account that gives it special tax treatment. Inside of that investment account, you can make investments just as you would in a non-retirement account.

Roth IRAs are special because you contribute after-tax dollars. You pay income tax on the money before you invest it. Because you’ve already been taxed on it, when you’re ready to begin withdrawing money in retirement, you'll have tax-free withdrawals. This tax-free treatment also applies to any growth the account earned, so you actually never pay taxes on the growth.

This is different from a traditional IRA or 401(k) which uses pre-tax dollars. While those types of accounts come with their own tax benefits, because you aren’t taxed upfront, you'll have to pay income taxes on any withdrawals you make in the future.

As mentioned above, Roth IRA contributions also grow tax-free. Any assets you purchase in the account, like stocks, can appreciate in value while any interest or dividends you earn can be reinvested. As long as you don’t take distributions on your earnings until after you hit age 59 ½ and have maintained your account for at least five years, Uncle Sam won’t hit you with an income tax bill. 

Because IRAs are tax-benefited accounts, there are rules about how much investors can contribute. For 2023, individuals earning less than $138,000 a year can contribute up to $6,500 while married couples can make the same contribution if their combined income is less than $228,000.

However, if your income exceeds these limits, you'll have to use a different individual retirement account — high-income earners who make more than this are not eligible to contribute to a Roth IRA.

Related: What is a traditional IRA?

People discussing financial strategies. What is a Roth IRA?

Pros and cons of a Roth IRA

Pros of a Roth IRA

Roth IRAs have some significant tax benefits that are worth taking advantage of. These are some of the biggest draws of investing in a Roth IRA.

  • Tax benefits. Investments kept in a Roth IRA grow tax-free.
  • No required minimum distributions.
  • Withdraw your original contribution early. You can withdraw your contributions without incurring penalties or being charged taxes.

Cons of a Roth IRA

Despite the perks of investing in a Roth IRA, there are some drawbacks to be mindful of. Here are some of the biggest ones to consider.

  • You have to wait to withdraw your earnings. You must have the account for 5 years before you can make tax-free withdrawals of earnings, even if you are over 59 ½.
  • Can’t claim tax deductions. Roth IRA contributions aren’t tax deductible.
  • Contribution limits. In 2023, you can contribute $6,500 if you are under age 50 and $7,500 if you are 50 or over.

Who is eligible for a Roth IRA?

You must have earned income to contribute to a Roth IRA. Earned income is money you earn, and are taxed on, in a job or salary from your business. Basically, if you paid FICA taxes on it, it counts as earned income.

However, there are restrictions for high-income earners. In 2023, individuals and married couples filing separately (and who don’t live together) can contribute to a Roth IRA if they make less than $153,000 per year. Married couples filing jointly can contribute if their combined earnings are less than $228,000.

But if you’re a married couple filing separately and you live together, you can’t make a contribution if your modified adjusted gross income (MAGI) is above $10,000.

One exception to this rule is the spousal Roth IRA. If you’re married and one spouse doesn’t work, you can contribute on their behalf. To be eligible you have to be married and file jointly. The total contribution for both spouses can’t be more than your earned income and it has to follow the same contribution limits. Spousal Roth IRAs can help couples double their contributions, especially if one spouse isn’t earning an income. 

Related: How to save for retirement

Roth IRA contribution limits

Contribution limits vary based on how you file your taxes, how old you are, and how much money you earn. In 2023, these are the contribution limits for a Roth IRA.

Filing StatusAgeIncomeContribution Limit
Single, head of household, or married filing separately (and you did not live with your spouse at any time during the year)Under 50 years oldLess than $138,000$6,500
Over 50 years old$7,500
Married filing jointly or qualifying widow(er)Under 50 years oldLess than $228,000$6,500
Over 50 years old$7,500

When you can withdraw from a Roth IRA

The good news is you can withdraw your original contribution from your Roth IRA account at any time, regardless of age. There are some limits, however, on when you can withdraw your earnings without paying taxes or incurring penalties.

Qualified distributions

A qualified distribution is a withdrawal you can make if you are over age 59 ½ and have maintained your Roth IRA for at least five years. These distributions can be taken tax-free and without penalty.

There are some special circumstances where you might qualify for a qualified distribution even if you don’t meet the age requirement. If you have a disability, are purchasing a home for the first time, are starting a family, or a payment is made to a beneficiary of your estate after you pass, you may be able to make a limited withdrawal.

Non-qualified distributions

Any withdrawal that doesn’t fit the requirements of a qualified distribution is considered a non-qualified distribution. These withdrawals incur a 10% penalty and the earnings in the account are subject to taxes. There are some exceptions for medical and educational expenses, otherwise, be prepared to pay up if you take a non-qualified distribution on your investment earnings before you reach age 59 ½.

How to open a Roth IRA

If you’re eligible, you can open a Roth IRA account with a brokerage firm. To figure out which firm to open an account with determine how active you want to be in managing your investments. 

If you go with a traditional brokerage firm, like Fidelity or Charles Schwab, you’ll have to actively make investments in your account. Just because you deposit money into the account does not mean it’s invested. You’ll want to take the money you put into the account and choose what types of assets to invest it in.

For investors who want a more hands-off approach, robo-advisors allow you to make passive investments. Wealthfront and Betterment are two examples of robo-advisors that do this. All you’ll need to do is set a goal, note your risk tolerance, and fund your account. The robo advisor will take care of managing your investments for you after that.

Once you’ve set up an account you’ll want to fund it and purchase assets. Just like a traditional brokerage account, your Roth IRA portfolio can include things like stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.

After you set everything up, keep investing and periodically check in on your portfolio. You can set automatic deposits to keep adding money to your account. If you’re managing it yourself, just make sure you invest whatever money you deposit. Every six months check in with your portfolio to see if it needs rebalancing.

FAQs

Can I have a Roth IRA and a 401(k)? 

Yes, you can have both a Roth IRA and a 401(k) as long as you meet the income requirements for contributing to a Roth IRA. Contributing to both can boost your portfolio and when you invest in a Roth IRA, you’ll have more control over how your money is invested, compared to a 401(k) which is typically managed by your company.

How does money grow in a Roth IRA?

Money grows in a Roth IRA when you regularly contribute to it and invest your money in assets like stocks, bonds, and ETFs. If you purchase shares of Tesla, for example, your Roth IRA will grow as the value of Tesla grows. Likewise, if you invest in assets that generate a dividend, such as REITs, you’ll be able to reinvest your dividend earnings. This allows your portfolio to increase in value thanks to compounding growth.

Of course, there is risk. If that Tesla stock goes down, the value of your account will go down as well. This is why you want to stick with a well-diversified portfolio that matches your timeline and risk tolerance.

Here's more on how to start investing

How much does it cost to start a Roth IRA?

Opening a Roth IRA typically requires no minimum deposit, depending on the account provider. While you can technically open an account with $0 you won’t be able to make investments in the account if you don’t fund it.

Your individual investments may incur fees, but opening an investment account should not require a fee.

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.