Roth IRA: A Basic Guide

Roth IRAs are retirement accounts that offer tax-free growth and tax-free withdrawals on your investments.
Reviewed by Michael Randall
Apr 25, 2022

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What is a Roth IRA?

A Roth IRA is an individual retirement account where you put after-tax dollars and enjoy tax-free-growth. The main benefit of a Roth IRA is that you can make withdrawals without paying penalties or taxes when you retire, assuming you wait until 59 1/2, and your account has been open for five years.

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.

» Use this Roth IRA calculator to see how much contributions to make

How does a Roth IRA work?

You pay taxes on your investment up front, let your money compound, and then your withdrawals in retirement are tax-free. You can even withdraw your contributions tax and penalty free when emergencies arise, Chad Nehring, a certified financial planner and registered investment advisor representative in Appleton, Wisconsin, said in an email interview. Nehring also said that while this may be an advantage, it isn't always advisable.

“Recognize that this isn’t necessarily a great strategy as money contributed to a Roth IRA should be considered 'long term' and meant for retirement,” he explained.

Another advantage of Roth IRAs is that they're not subject to required minimum distributions for the account holder. This means they don't have to withdraw distributions at any point while they're alive unlike with traditional IRAs or 401(k)s.

Roth IRA benefits

A Roth IRA is a smart saving tool for younger people just starting out, because they’re likely to start earning more as they move along in their careers and face higher income tax rates as a result. 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."

Other benefits of a Roth IRA, include:

  • Potential tax savings: With a Roth IRA, you pay taxes on the money you contribute now, rather than later, when your tax rate may be higher. If your tax rate is lower now, it makes sense to pay taxes now in return for tax-free retirement withdrawals.

  • No required minimum distributions: Roth IRAs aren't subject to the RMDs required from a traditional IRA or 401(k) starting at age 72.

  • No income tax on inherited Roth IRAs: If you pass a Roth IRA to a heir, they enjoy tax-free withdrawals as long as the account was held for at least five years at the time of the account holder's death.

  • 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).

  • 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).

For the sake of a balanced view, it's advisable to think of any drawbacks of a Roth IRA, too. One is that you're unable to take loans in 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.

Also, early withdrawals (before age 59½) of your investment earnings come with a 10% penalty unless you meet one of a handful of exceptions.

Roth IRA income limit

Anyone can open a Roth IRA, as long as they meet they meet the income limit (in the table below), and have income from work (the IRS term is "taxable compensation").

Filing status

2021/2022 MAGI

Maximum annual contribution

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

2021: Less than $125,000

2022: Less than $129,000

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

2021: $125,000 up to $140,000

2022: $129,000 up to $144,000

Contribution is reduced

2021: $140,000 or more

2022: $144,000 or more

No contribution allowed

Married filing jointly or qualifying widow(er)

2021: Less than $198,000

2022: Less than $204,000

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

2021: $198,000 up to $208,000

2022: $204,000 up to $214,000

Contribution is reduced

2021: $208,000 or more

2022: $214,000 or more

No contribution allowed

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

2021: Less than $10,000

2022: Less than $10,000

Contribution is reduced

2021: $10,000 or more

2022: $10,000 or more

No contribution allowed

Read our IRA limits page for more details on Roth IRA income limits and the exceptions to them.

If you don't qualify for a Roth IRA, you have the option of contributing to a Roth through a method called a 'backdoor Roth IRA conversion'. It's when you put the money into a traditional IRA account, then convert your contribution to a Roth IRA and pay taxes on the money you contribute.

» Ready to open a Roth? Here is a step-by-step guide on how to open a Roth IRA

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Choosing your Roth IRA investments

You've decided you want to open a Roth IRA, now what? There are several types of securities you could invest in using your Roth, including:

Roth IRA vs. traditional IRA

If you're wondering the main difference between a Roth IRA and traditional IRA, it's in how they're taxed. Roth IRAs give you tax-free withdrawals after retirement while traditional IRAs give you a tax break beforehand. 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 are a good idea.

» Learn more about Roth IRA vs. traditional IRA 

Roth IRA rules

Here are a few withdrawal and distribution rules you must follow:

  • 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.

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

  • 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.

  • 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.

» Read our top picks for the best Roth IRA accounts

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