What Is a Roth IRA? Rules & How to Open One

A Roth IRA is an individual retirement account that you contribute to with after-tax dollars. Your contributions and investment earnings grow tax-free.
June Sham
Elizabeth Ayoola
Tina Orem
By Tina Orem,  Elizabeth Ayoola and  June Sham 
Updated
Edited by Chris Hutchison Reviewed by Michael Randall

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Nerdy takeaways
  • Anyone with earned income can open a Roth IRA through a brokerage firm.

  • You can contribute to a 2023 IRA through the tax filing deadline in April 2024.

  • You can have both a Roth IRA and a traditional IRA, but the accounts share an annual contribution limit. In 2023, that limit is $6,500, and in 2024, it is $7,000. Those 50-plus can contribute an additional $1,000 both years.

  • In 2024, the income limit to contribute to a Roth IRA increases to $161,000 for single filers and $240,000 for married filing jointly.

What is a Roth IRA account?

A Roth IRA is an individual retirement account that takes after-tax dollars, then provides tax-free growth and withdrawals in retirement. Once you're 59 1/2 — and the account has been open for at least five years — you can withdraw from your Roth IRA without paying federal taxes.

» Ready to get started? See our top picks for the best Roth IRA accounts.

Roth IRA vs. traditional IRA: What's the difference?

The main difference between a Roth IRA and traditional IRA is how they're taxed. Roth IRAs give you tax-free withdrawals in retirement, while traditional IRAs give you a tax break when you contribute. So, if you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, Roth IRAs might be a better option for you. You can read our Roth IRA vs. traditional IRA article to learn more about the differences.

» Learn more: Find the best IRA account for you

How does a Roth IRA work?

A Roth IRA works by taking after-tax dollars from a qualifying source of earned income. Money contributed to your Roth IRA could come from a job, but could also be a rollover from a Roth 401(k) plan, conversion from an existing traditional IRA or 401(k) plan, a spousal contribution, or other transfer. (More on these options below.)

Then, you’ll need to choose a broker to open your Roth IRA and select where you want to invest the money. Over a long time horizon, those investments could earn a return.

That’s where the real benefit of the Roth IRA kicks in: Your investment growth could have been taxed when it was time to withdraw the money, but because you didn’t receive a tax benefit when you funded the account, you’ll get the money tax-free. And, unlike a 401(k) or a traditional IRA, you aren’t required to take required minimum distributions (RMDs) after a certain age.

And if for some reason you need the money in your Roth IRA before retirement, you can withdraw the contributions — but not investment earnings — at any time without additional taxes or penalties from the IRS.

» See how your contributions can grow: Use our free Roth IRA calculator

What can you invest in with a Roth IRA?

There are several types of securities you could invest in using your Roth if you choose a more hands-on approach to investing. Some of them include:

Are Roth IRAs insured?

If your retirement account is with a bank that offers FDIC insurance, it is insured, but under a different category from normal deposit accounts. What this means for retirement accounts is that you still get $250,000 in insurance protection, but it’s a combined limit across any traditional and Roth IRAs held at that bank.

What’s a spousal Roth IRA?

A Roth IRA is considered a spousal Roth IRA when a working spouse contributes to the account on behalf of their partner who earns little or no income. It’s an exception to the rule where only those with earned income can contribute to their IRA.

Spousal IRAs have strict rules, including that the couple must file as “married filing jointly” on their tax returns, fall under the income limit for Roth IRAs, and have the account solely in the non-working spouse’s name.

» MORE what you need to know about spousal Roth IRAs

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How to open a Roth IRA in 6 steps

1. Find out if you're eligible.

Roth IRAs have income limits, so anyone can have a Roth IRA, but the ability to contribute depends on your annual income. At higher levels, that amount is phased out and, eventually, eliminated.

For 2023, the contribution limit is $6,500 if your modified adjusted income is below $138,000 (single filers) or $218,000 (married filing jointly). For 2024, the contribution limit rises to $7,000 if your MAGI is below $146,000 (single filers) or $230,000 (married filing jointly. For both years, the contribution amount goes up $1,000 if you’re 50 or older.

At incomes above that, your contribution limit begins to phase out, until it is eliminated completely at $153,000 for single filers in 2023 ($161,000 in 2024) and $228,000 for those married filing jointly in 2023 ($240,000 in 2024).

2. Decide what type of investor you are.

If you're a “do-it-yourself” investor, choose a brokerage.

You can open a Roth IRA at an online broker and then choose your own investments. This may be simpler than you think — you can build a diversified portfolio with just three or four mutual funds that are in different asset classes. When comparing brokers, look at trade commissions and the investment fees of their offered funds (also called expense ratios).

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, 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 small fee for the service, but their fees generally are far lower than a human financial advisor.

3. Choose how much you want to invest.

How much do you need to open a Roth IRA? While there generally isn’t a fee for opening a Roth IRA, there may be other costs and requirements depending on your provider and selected investments. Some brokers and robo-advisors — but not all — may require a minimum amount to open an account with them, or charge trading commissions when investments are bought and sold.

Think about your budget, your time horizon, and investing goals, and consider investing only money you won’t need in the next five years. That way, you have time to ride out any highs and lows of the market.

4. Select a provider to open your Roth IRA.

The next step in how to open a Roth IRA is to find a home for your account.

If you're a 'do-it-yourself' investor, opening a Roth IRA at an online broker makes a lot of sense. At the best brokers, you’ll find a large list of low-cost investments to choose from, including index mutual funds and exchange-traded funds. The top brokers also offer extensive retirement planning tools, robust customer service and reasonable account minimums and fees. And you maintain complete control over how your retirement funds are invested.

For 'hands-off' investors, or those who want to invest for retirement but don’t want to worry about managing their portfolio over time, a robo-advisor is an easy choice. 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 amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who seek a less volatile investment account.

As an investor, all you have to do is open your Roth IRA, link your bank account and follow the steps the provider uses to build your portfolio. The robo-advisor then purchases the investments for you and manages the account over time.

Many robos also offer 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. (Robo-advisors generally are registered investment advisors, operating under a similar structure to human investment advisors.)

5. 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 account.

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.

6. Pick your investments.

The last step in learning how to open a Roth IRA is to decide how to invest the money in the account. That's because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that money 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 riskier investments, such as stock funds, and how much you want to keep relatively safe in, for example, bond funds and cash. This mix is called your asset allocation.

And if you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Be sure to rebalance the investments as they shift out of the original allocation you decided on, because you won’t have robo-advisors to do it for you.

What if you're not eligible?

If your income means you don't qualify to contribute to a Roth IRA, it still might be possible to receive the tax benefits of a Roth IRA.

Two options to explore would be a Roth IRA conversion and a backdoor Roth. To do a Roth IRA 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 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.

A backdoor Roth is a form of a Roth conversion but specifically relates to high-earners who, because they can't contribute to a Roth IRA, make nondeductible contributions to a traditional IRA first and then convert it into a Roth IRA. A correctly executed backdoor Roth typically does not generate taxes, as no deduction was received for that initial contribution, but there are some caveats, including whether the investor has an IRA balance or if any gains have occurred during the transfer.

» A step-by-step guide to backdoor Roth IRAs

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What are the Roth IRA rules?

Once you've opened your account, here 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 59 ½ years old, and who have held their accounts for at least five years, can take distributions, including earnings, without paying federal taxes.

    IRS. Traditional and Roth IRAs. Accessed Mar 17, 2022.

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 59 ½, 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 59 1/2 include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, having a baby or adopting. Be sure you understand all the rules of these exceptions.

» Get a better understanding of Roth withdrawal rules

Frequently asked questions

What makes a Roth IRA so attractive to investors is the potential tax savings. If you think you'll be in a higher tax bracket when you retire than you are now, a Roth IRA may be more beneficial than a traditional IRA. The reason: You've already paid taxes on your contributions, so your higher tax bracket won't result in a high tax bill when it's time to enjoy your hard-earned money.

Another reason the Roth IRA is attractive is rising inflation. Inflation erodes the value of money over time. Giving your money an opportunity to grow tax-free can be extra lucrative when inflation is high.

A 401(k) and a Roth IRA are both valuable retirement savings tools, and there's good news: You don't have to choose. As long as you're eligible for a Roth IRA, you can contribute to that alongside an employer-sponsored retirement plan like a 401(k). But that, of course, requires having enough money to contribute to both, which isn't always possible. If you need to choose one place to direct your dollars, read our comparison of 401(k)s and IRAs.

There are a few drawbacks of a Roth IRA:

  • Five-year wait to withdraw earnings: Waiting five years from the tax year of your first Roth IRA contribution to withdraw earnings tax-free can be a drawback if you’re close to retiring. Withdrawing contributions before fulfilling the five-year rule could result in paying income taxes and a 10% penalty.

  • No tax deductions: You also aren’t eligible for any tax deductions during the year you contribute, unlike with a traditional IRA. Tax deductions are helpful as they can reduce your adjusted gross income, and your overall tax bill for the year you contribute. You may qualify to claim the saver’s credit, which is a tax credit you get for making eligible contributions to an IRA. Keep in mind that the credit has income restrictions.

  • Income limits: Roth IRAs have income limits unlike traditional IRAs. If you make more than the allowed amount, you may not qualify for a Roth IRA.

Many discount brokers and robo-advisors have $0 minimums to open a Roth IRA. However, the tax perks of investing in an IRA start only when you start contributing money to the account. The IRS allows you to contribute up to $6,500 in 2023, or $7,500 if you're 50 and older. You're not required to contribute the maximum.

» Find the best IRA account for you

You can add money to your Roth IRA at whatever cadence and amount work for your budget. Many brokers and robos allow you to set up automatic deposits to transfer money from your bank into your Roth account.

Yes. You can put your IRA money in a variety of investments, and some of those investments may lose value, especially in the short term. It's important to understand your risk tolerance when choosing investments. Learn more about how to invest your IRA.

Depending on your investment selections, the average Roth IRA return could be between 7% and 10% annually. However, because this depends on market performance year to year, it's possible that you may earn less as well. Reviewing your goals, time horizon, and investment selections regularly can help guide what decisions you might want to make when it comes to managing your Roth IRA returns.

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