How does a Roth IRA work?
A Roth IRA is a retirement account that encourages you to save by offering you a tax benefit. Unlike with a traditional IRA, your contributions to a Roth IRA are not tax-deductible. But those contributions and your investment earnings grow tax-free, meaning there’s no tax on your Roth IRA withdrawals in retirement. With a traditional IRA, your withdrawals in retirement are taxed as income.
Like a traditional IRA, a Roth IRA is an account that holds your investments, rather than an investment itself. You open a Roth IRA at a brokerage or bank, then select what you want to invest in, such as mutual funds, stocks, bonds, exchange-traded funds (ETFs) or bank savings products. (For a long-term goal like retirement, we recommend investing in stocks and bonds because of their higher returns. That means opening your Roth at a brokerage or robo-advisor rather than at a bank.)
» Ready to begin? Learn how to open a Roth
What are the benefits of a Roth IRA?
The usual advice, and for good reason, is that Roth IRAs are a great retirement-savings account if you expect your tax rate to be higher in the future. That’s because you pay income tax on your money before contributing it to the Roth, so if your tax rate is lower now, it makes sense to pay taxes now in return for tax-free growth on your investment earnings.
In other words, Roth IRAs are a smart savings tool for young people just starting out, because they’re likely to face higher income tax rates as they move along in their career. But even someone who is further along on the career path may like a Roth IRA, because these accounts provide tax-free income in retirement.
Here are other Roth IRA benefits to consider:
In 2019, Roth IRAs allow for contributions of up to $6,000 per year — or $7,000 if you’re 50 or older — and you can use it in addition to a 401(k). (Those limits are up from $5,500 and $6,500 in 2018.)
You can withdraw the money you contributed without tax or penalty at any time, with no restrictions, because you’ve already paid taxes on that money. You may, however, be taxed or penalized if you withdraw your investment earnings.
Once you hit 59½ and have held the account for at least five years, you can take distributions, including earnings, from a Roth IRA without paying federal taxes.
You can use Roth IRA money to pay for qualified college expenses without an early distribution penalty, so you can use the account to supplement or as an alternative to a college savings account like a 529 plan. Keep in mind that only the penalty is waived — you may still owe income taxes on early distributions of earnings, even if for qualified college costs.
You can open a Roth IRA at any age, as long as you have earned income (you can’t contribute more than your earned income).
The account is not subject to the required minimum distributions typically required from a traditional IRA or 401(k) beginning at age 70½. This means you can use a Roth to pass money to your heirs.
Are you eligible for a Roth IRA?
Here’s the one downside: You won’t be eligible for a Roth if you earn too much.
The amount you can contribute to a Roth IRA begins to shrink at certain thresholds for modified adjusted gross income, and keeps shrinking as income rises, until your ability to contribute is eliminated completely.
For more details on Roth IRA limits and the exceptions to them, see our IRA limits page.
One note for high earners: A backdoor Roth IRA strategy, which involves converting a traditional IRA into a Roth IRA, allows you to sidestep these income limits and fund a Roth anyway.
There’s another contribution limit to keep in mind: You can contribute to a Roth IRA only as much as your earned income ("taxable compensation" in IRS parlance) for the year. But there is an exception: For a married couple, if one spouse isn’t working for pay, that spouse can contribute to a spousal IRA, as long as that spouse’s contributions and the working spouse’s contributions, added together, don’t exceed the couple’s earned income for the year. Read more about spousal IRAs.
Where can you open a Roth IRA?
Most online brokers, banks and robo-advisors offer Roth IRAs. A good first step in the Roth IRA shopping process is deciding whether you want to take a hands-off approach to investing — in which case a robo-advisor and its automated investment process might be appealing — or a more active approach to choosing your investments, which might make a traditional broker more attractive. Because most banks offer access to savings vehicles (like CDs), rather than investments, they are generally not the best place to open an IRA, which should be geared toward long-term growth.
Two of NerdWallet’s highest-ranked providers for hands-off Roth IRA management are Wealthfront and Betterment. Robo-advisors use computer algorithms to offer investment plans tailored to your goals and time horizon, all for a fraction of the cost of traditional investment advisors.
Two of NerdWallet’s top picks for conventional Roth IRA brokerages are TD Ameritrade and Merrill Edge. These brokers appear in NerdWallet’s rankings because of their low costs, large selection of mutual funds and no account minimums.
» Want the deep dive? Here are all of our top picks for the best Roth IRA accounts