Roth IRA: Definition and How to Open One in 4 Steps
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What is a Roth IRA?
A Roth IRA is an individual retirement account that lets you contribute money you've already paid taxes on. The money you invest grows tax-free, and qualified withdrawals in retirement are also tax-free.
Roth IRAs "have more investment flexibility than you might have in your employer's retirement plan," says Erik Carter, a CFP with Financial Finesse in White Plains, New York. "And it has more flexibility in the sense that you can withdraw the contributions at any time."
The accounts are popular. According to Fidelity Investments, 62.9% of IRA contributions in the first quarter of 2024 went to Roth IRAs.
» Dive deeper with our article on Roth IRA pros and cons.
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How does a Roth IRA work?
A Roth IRA works by putting the money you contribute into investments. The money you contribute to a Roth IRA could come from a job, but it 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.
Who can contribute to a Roth IRA?
Roth IRA income limits
If your modified adjusted gross income (MAGI) is below $146,000 (single filers) or below $230,000 (married filing jointly), you can contribute the full amount the IRS allows to a Roth IRA – $7,000 for those under 50 and $8,000 for those 50 and older. At incomes above the limits, the amount you can contribute becomes smaller until you are no longer eligible.
» Learn more about Roth IRA contribution and income limits.
Roth IRA conversion
If you don't qualify to contribute, or if you just want to move money from a traditional IRA into a Roth IRA, you can do a Roth IRA conversion. In a conversion, funds are transferred from a traditional IRA or a qualified employer-sponsored retirement plan (such as a 401(k) plan) into a Roth IRA. If you're moving money that previously received a tax deduction, then the Roth conversion would be taxable, though you'd still have the benefit of taking out any investment gains in retirement tax-free.
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 individual stocks, bonds, exchange-traded funds, index funds and mutual funds.
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.
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. You pay a fee for the service, but their fees generally are far lower than those of a human financial advisor.
» Ready to get started? See our picks for the best Roth IRA accounts.
2. Choose how much you want to invest
Many robo-advisors and brokers have $0 minimums to open an account and allow you to set up automatic deposits to transfer money from your bank into your account.
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 any stock market volatility.
3. Gather your paperwork
Now it's time to gather any 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. A Roth IRA is just the account type, not an automatic investment. To build wealth over time, the 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.
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What are the rules for taking money from my Roth IRA?
Setting aside money in a retirement account — and not being able to access it for years — can feel intimidating. With a Roth IRA, it's a little different.
"Sometimes people worry that if they put money into a retirement account, that money will be tied up and they can't get to it in an emergency," says Carter, the CFP. "But with a Roth IRA, if you put in $6,000 ... you can pull out your $6,000 at any time."
Here's a quick explainer on the rules of withdrawing from your Roth IRA:
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.
» Get the details on Roth IRA withdrawal rules
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