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, then select what you want to invest in, such as mutual funds, stocks, bonds and exchange-traded funds (ETFs).
» Ready to begin? Here are our top picks for the best Roth IRA providers
What are the benefits of a Roth IRA?
In 2019, it allows for contributions of up to $6,000 per year — or $7,000 if you are 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.)
Because you’ve already paid taxes on your Roth contributions, you can withdraw them without tax or penalty at any time. 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.
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.
In 2019, 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. Open the collapsible below to see the latest thresholds.
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.
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.