Roth IRA: Definition and How to Open One in 4 Steps

A Roth IRA is an individual retirement account that you contribute to with after-tax dollars. While you don't get a tax break up front, your contributions and investment earnings grow tax-free.
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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.

Those tax perks are part of what makes Roth IRAs so popular. According to Fidelity Investments, 62.9% of IRA contributions in the first quarter of 2024 went to Roth IRAs

Fidelity Investments. Q1 Retirement Analysis. Accessed Jul 12, 2024.
.

» Dive deeper with our article on Roth IRA pros and cons.

Ready to choose an IRA account?

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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.

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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. For 2024, the contribution limit is $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.

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?

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

    Internal Revenue Service. Traditional and Roth IRAs. Accessed Jul 12, 2024.
    .

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

Frequently asked questions

The main difference between a Roth and a traditional IRA is how they're taxed. Roth IRAs offer no tax deduction when you put money in, but you get tax-free withdrawals in retirement. Traditional IRAs can give you an upfront tax deduction when you contribute, and you pay taxes later, on any withdrawals. Another difference is unlike a traditional IRA, Roth IRAs do not require you to take required minimum distributions (RMDs) after a certain age.

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 to know about spousal Roth IRAs.

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.

» Learn more about Roth IRA pros and cons

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.

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 vs. IRAs.

Yes. You can put your Roth 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.

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