Roth IRA: Definition & How to Open One
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What is a Roth IRA?
A Roth IRA is an individual retirement account to which you can contribute after-tax dollars. The money you invest grows tax-free, and once you're 59½ and the account has been open for at least five years, you can withdraw from the Roth IRA without paying federal taxes.
The retirement account was introduced in 1998 and is named after Sen. William Roth, who led the creation of the retirement plan.
“Bill wanted to create a culture of savings,” Roth's widow, Jane Roth, a judge on the 3rd U.S. Circuit Court of Appeals, told NerdWallet in 2016. “He realized how important and how difficult it was for people to save money for higher education and retirement. One of his aims was to find incentives and methods and to help with that.”
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How does a Roth IRA work?
A Roth IRA account works by taking contributions of after-tax dollars from a qualifying source of earned income and investing it. Money contributed to your Roth IRA could come from a job, but could also be a rollover from a Roth 401(k) plan, a conversion from an existing traditional IRA or 401(k) plan, a spousal contribution, or other transfer.
Over time, the investments in your Roth IRA could earn a return and that money grows tax-free. And because you paid taxes upfront when you funded the account, you’ll also get to withdraw the money tax-free in retirement as long as you follow the Roth IRA withdrawal rules.
» See how your contributions can grow with our free Roth IRA calculator.
Unlike a 401(k) plan or a traditional IRA, Roth IRAs do not require you to take required minimum distributions (RMDs) after a certain age. If you need the money in your Roth IRA before age 59½, though, you can withdraw the contributions — but not investment earnings — at any time without additional taxes or penalties from the IRS.
Who can contribute to a Roth IRA?
For 2024, the Roth IRA contribution limit is $7,000 for those under 50 and $8,000 for those 50 and older. If your modified gross income (MAGI) is below $146,000 (single filers) or below $230,000 (married filing jointly), you can contribute the full amount.
At incomes above the limits, the amount you can contribute becomes smaller, until you are no longer eligible. In 2024, no contribution is allowed for single filers who make $161,000 or more. That number is $240,000 or more for those married filing jointly.
How to open a Roth IRA in 4 steps
1. Decide what type of investor you are
If you're a “do-it-yourself” investor, choose a brokerage
You can open an account at an online broker and then choose your investments. The best brokers offer a large list of securities to choose from, including:
When comparing brokers, look at trade commissions and the investment fees of their funds (also called expense ratios). More things to look for include extensive retirement planning tools and robust customer service.
» Shop around with our picks for the best online brokers.
If you're a “manage it for me” or hands-off investor, choose a robo-advisor
If you’d rather have someone pick an investment portfolio for you and manage your investments over time, you can open your Roth IRA at a robo-advisor.
Robo-advisors are online services that build and maintain a diversified portfolio for you. Generally, robo-advisors hire investment pros to develop a handful of portfolios aimed at different types of investors. Some robos offer portfolios that vary based on the amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who may be closer to retirement or more cautious about their money.
You pay a fee for the service, but their fees generally are far lower than those of a human financial advisor. Robos also offer other services that can help maximize your savings, such as goal-setting tools to get your finances on track and strategies to reduce your tax bill.
» See our picks for the best robo-advisors.
2. Choose how much you want to invest
Many robo-advisors and brokers have $0 minimums to open an account. The IRS allows you to contribute up to $7,000 in 2024 if you're under 50, or $8,000 if you're 50 or older. You're not required to contribute the maximum.
You can add money to your Roth IRA at whatever cadence and amount works for your budget. Many Roth IRA providers allow you to set up automatic deposits to transfer money from your bank into your account.
Think about your time horizon and investing goals, and consider investing only money you don't think you'll need in the next five years. That way, you'll have time to ride out the stock market's highs and lows.
3. Gather your paperwork
So, you’ve learned all about how Roth IRAs work and even settled on a provider. Now what? It’s time to gather any paperwork or documentation you may need to set up your Roth IRA.
Exact requirements may vary based on the financial institution, but generally, you may want to have the following information available during the sign-up process:
Access to a working email and phone.
An ID (such as a state driver’s license or a passport) to confirm your identity, address and date of birth.
A Social Security number or tax identification number.
Proof of employment, if applicable.
The name, addresses and dates of birth of any beneficiaries you’d like to add to the account.
The name and addresses of any trusted contacts in case your account’s security is breached.
The routing and/or account numbers for the bank account you’ll use to fund your Roth IRA.
4. Pick your investments
The last step in learning how to open an account is to decide on your Roth IRA investments. That's because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that money you put in needs to be invested.
If you're a hands-off investor and you've opted to open your Roth IRA at a robo-advisor, that service will choose a diversified investment portfolio for you.
If you're a DIY investor, you can get that diversification on your own by building a portfolio out of index mutual funds and ETFs. To do that, you’ll want to decide how much of your money to put toward investments, such as stock funds, and how much you want to keep in other investments, such as bond funds and cash. This mix is called your asset allocation.
If you get stuck, you can use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Robo-advisors will rebalance your investments as they shift out of the original allocation you chose, but if you're picking your own investments, this is something you'll need to do on your own.
What are the Roth IRA withdrawal rules?
Once you've opened your account, there are a few withdrawal and distribution rules you must follow:
Roth IRA withdrawal rules
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.
People at least 59½ years old and who have held their accounts for at least five years can take distributions, including earnings, without paying federal taxes.
Roth IRA withdrawal penalty
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.
Examples of qualified withdrawals before age 59½ include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, and having a baby or adopting. Be sure you understand all the rules of these exceptions.
» Ready to get started? See our top picks for the best Roth IRA accounts.
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