Investing

What Is a Roth IRA?

Roth IRAs are retirement accounts that offer valuable tax benefits, including tax-free growth on your investments.

Andrea Coombes, Tina OremSeptember 21, 2020

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What is a Roth IRA?

A Roth IRA is an individual retirement account in which money grows tax-free and withdrawals in retirement are tax-free. In 2020 you can contribute up to $6,000 ($7,000 if you're 50 or older) if your modified adjusted gross income is below $139,000 (single filers) or $206,000 (married filing jointly).

How a Roth IRA works: 5 key characteristics

  1. You pay taxes on money you put in the account. You cannot deduct the contributions on your taxes.

  2. In 2020 you can contribute up to $6,000 ($7,000 if you're 50 or older).

  3. You cannot contribute to a Roth IRA if your modified adjusted gross income (MAGI) is more than $139,000 in 2020 (single filers) or $206,000 (married filing jointly). (The backdoor Roth strategy offers a workaround — more on that below.)

  4. People at least 59½ years old and who hold their accounts for at least five years can take distributions, including earnings, without paying federal taxes.

  5. You don't have to take any money out of your Roth IRA if you don't want to. There are no required minimum distributions (RMDs).

Here's how a Roth IRA works in terms of mechanics.

  • Open a Roth IRA at a brokerage or bank and invest the money. Then you select what you want to invest your money in, such as mutual funds, stocks, bonds, exchange-traded funds (ETFs) or bank savings products. If you want to invest in stocks and bonds, you may want to open your Roth at a brokerage or robo-advisor rather than at a bank. (Here's more on how to invest your IRA.)

  • Add money over time. A lump sum or smaller contributions over the course of the year are fine, as long as your contributions don't exceed $6,000 ($7,000 if you're 50 or older) or your taxable compensation, whichever is smaller. You can also add money to a Roth by rolling over money from another retirement account.

How to open a Roth IRA

Most online brokers, banks and robo-advisors offer Roth IRAs. Here's how they differ.

  • Banks. Because most banks offer 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.

  • Robo-advisors. If you want to take a hands-off approach to investing, a robo-advisor and its automated investment process might be appealing.

  • Traditional brokers. These offer a more active approach to choosing your investments.

Here are some of our top picks for best Roth IRA accounts:

You Invest by J.P.Morgan
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Fees and minimums:

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  • No account minimum.

Promotion:

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Betterment
NerdWallet rating 

on Betterment's website

Fees and minimums:

  • 0.25% per year.

  • No account minimum.

Promotion:

  • Up to 1 year of free management with qualifying deposit.

Ellevest
NerdWallet rating 

on Ellevest's website

Fees and minimums:

  • $1 - $9 per month.

  • No account minimum.

Promotion:

  • Two months free with promo code "nerdwallet."

» Want the deep dive? Here are all of our top picks for the best Roth IRA accounts

Who is eligible for a Roth IRA?

Here are the basic rules and qualifications.

  • You have to have earned income. You must have income from work (the IRS term is "taxable compensation"). The max you can contribute to a Roth in a year is your income from work or $6,000 ($7,000 if you're age 50 or older), whichever is less.

  • You must be under the income limit. The amount you can contribute to a Roth IRA begins shrinking at certain thresholds for modified adjusted gross income, and it keeps shrinking as income rises. (See IRS Publication 590-A, Worksheet 2-1, for complete instructions on figuring MAGI for Roth IRAs.)

Do you qualify for a Roth? Roth IRA income limits

Filing status

2019 MAGI

2020 MAGI

Maximum annual contribution

Single, head of household or married filing separately (if you didn't live with spouse during year)

Less than $122,000

Less than $124,000

$6,000 ($7,000 if 50 or older)

$122,000 up to $137,000

$124,000 up to $139,000

Contribution is reduced

$137,000 or more

$139,000 or more

No contribution allowed

Married filing jointly or qualifying widow(er)

Less than $193,000

Less than $196,000

$6,000 ($7,000 if 50 or older)

$193,000 up to $203,000

$196,000 up to $206,000

Contribution is reduced

$203,000 or more

$206,000 or more

No contribution allowed

Married filing separately (if you lived with spouse at any time during year)

Less than $10,000

Less than $10,000

Contribution is reduced

$10,000 or more

$10,000 or more

No contribution allowed

For more details on Roth IRA limits and the exceptions to them, see our IRA limits page.

Roth IRA withdrawals and distributions

Here's how Roth IRA distributions basically work.

  1. 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 on which you already paid income tax.

  2. When you withdraw money from a Roth IRA, the IRS always assumes your original contributions come out first.

  3. Qualified withdrawals of investment earnings in the account come out tax-free. However, in certain circumstances the IRS may want a piece of those returns, in the form of taxes and a possible penalty, if you withdraw early or otherwise don’t meet the rules for a qualified withdrawal.

  4. People at least 59½ years old and who hold their accounts for at least five years can take distributions, including earnings, without paying federal taxes.

» Check out our easy explainer on Roth IRA withdrawal rules

Understanding how Roth IRAs work: advantages and benefits

  • Potential tax savings. If you expect your tax rate to be higher in the future, Roth IRAs may be worth it because you contribute money now that you'll pay income taxes on this year rather than in the future when your tax rate is higher. If your tax rate is lower now, it makes sense to pay taxes now in return for tax-free retirement withdrawals.

  • Easy withdrawals. You can withdraw the money you contributed any time, without taxes or penalty. (You may be taxed or penalized if you withdraw investment earnings.)

  • Double dipping. You can contribute to a Roth in addition to a 401(k). In 2020, the Roth limit is $6,000 per year ($7,000 if you’re 50 or older).

  • Flexible timing. You can choose when and how much you contribute to a Roth IRA. For example, you could contribute $6,000 on the first day of the year, or split up your contributions over many months.

  • Extra time to contribute. You have until the tax deadline to contribute for the previous calendar year.

  • Tax-free distributions. 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.

  • No age limit to open. 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).

  • No RMDs. Roth IRAs aren't subject to the required minimum distributions required from a traditional IRA or 401(k) starting at age 72 (in 2019 and earlier years, that age was 70½).

roth ira

Can you lose money in a Roth IRA?

Yes. Depending on what you invest your Roth IRA money in, you may, at times, see the value of your account dip. That’s especially true if you invest in the stock market. But despite that volatility, investors who stick with stocks for the long haul are able to ride out the dips and watch their money grow at average returns exceeding just about any other investment.

The key is to make sure your investments are diversified. If that seems like a task you don’t want to deal with, then consider the benefits of a robo-advisor — it will pick a diversified portfolio for you.

Roth IRA vs. traditional IRA

If you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, a Roth IRA is a good idea.

  • 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 careers.

  • Someone further along on their career path may also like a Roth IRA, because they provide tax-free income in retirement. That provides what some financial advisors call "tax diversification."

  • Money stashed in accounts, such as 401(k)s and traditional IRAs, leads to tax bills in retirement. A Roth IRA can offer a convenient way to manage that tax bill; for example, by pulling at least some income from the Roth to avoid being pushed into a higher tax bracket.

There are many advantages to a Roth IRA, but nothing’s perfect. Here are a couple of disadvantages to consider:

--You can’t take a loan from an IRA the way you can with many 401(k)s. That said, you can always withdraw your Roth IRA contributions anytime without penalty, interest or taxes. --Early withdrawals (before age 59½) of your investment earnings come with a 10% penalty unless you meet one of a handful of exceptions.

Whether $1 million is enough for a comfortable retirement will depend on your lifestyle, location and life expectancy. Half of Americans (50%) believe $1 million is enough to retire on, while 31% say it would not be enough, according to a NerdWallet survey, conducted online by The Harris Poll, of more than 2,000 U.S. adults in June 2018. Nineteen percent are not sure if it is enough.

Overall, only 32% of Americans say they’re confident they’ll have enough money saved for retirement by their desired retirement age based on their current rate of savings. Making use of tax-advantaged retirement accounts — including workplace retirement plans and a Roth IRA — can help you join that group.

Use a retirement calculator to get a personalized goal, then motivate yourself to reach it. One fun way to do that is to figure out when your nest egg will hit that $1 million mark. You can use the calculator below to estimate when you’ll unlock the seven-figure badge.

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from June 14-18, 2018, among 2,024 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated.