Roth IRA: Definition & 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 are also tax-free.

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. » Learn more: Roth IRA vs. traditional IRA

The Roth IRA was introduced in 1998 and is named after Sen. William Roth, who led the creation of the retirement plan.

“Bill wanted to create a culture of savings,” Roth's widow, Jane Roth, a judge on the 3rd U.S. Circuit Court of Appeals, told NerdWallet in 2016. “He realized how important and how difficult it was for people to save money for higher education and retirement. One of his aims was to find incentives and methods and to help with that.”

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How does a Roth IRA work?

A Roth IRA works by putting the money you contribute into investments. Your Roth IRA contributions could come from a job, but 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.

The rules stipulate that once you're 59½ and the account has been open for at least five years, you can withdraw from the Roth IRA without paying federal taxes.

Unlike a 401(k) plan or a traditional IRA, Roth IRAs do not require you to take required minimum distributions (RMDs) after a certain age. If you need the money in your Roth IRA before age 59½, though, 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 with our free Roth IRA calculator.

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Who can contribute to a Roth IRA?

If your modified 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. For 2024, the Roth IRA contribution limit is $7,000 for those under 50 and $8,000 for those 50 and older.

Filing status

Roth IRA income limits 2024

Roth IRA contribution limits 2024

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

Less than $146,000.

$7,000 ($8,000 if 50 or older).

$146,000 or more, but less than $161,000.

Contribution is reduced.

$161,000 or more.

No contribution allowed.

Married filing jointly or surviving spouse

Less than $230,000.

$7,000 ($8,000 if 50 or older).

$230,000 or more, but less than $240,000.

Contribution is reduced.

$240,000 or more.

No contribution allowed.

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

Less than $10,000.

Contribution is reduced.

$10,000 or more.

No contribution allowed.

At incomes above the limits, the amount you can contribute becomes smaller, until you are no longer eligible. In 2024, no contribution is allowed for single filers who make $161,000 or more. That number is $240,000 or more for those married filing jointly.

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, then convert that money 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.

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:

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. 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 the amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who may be closer to retirement or more cautious about their money.

You pay a fee for the service, but their fees generally are far lower than those of a human financial advisor. Robos also offer other 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.

» 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. The IRS allows you to contribute up to $7,000 in 2024 if you're under 50, or $8,000 if you're 50 or older. You're not required to contribute the maximum.

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

Think about your time horizon and investing goals, and 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 the stock market's highs and lows.

3. 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.

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. That's because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that 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. To do that, you’ll want to decide how much of your money to put toward investments, such as stock funds, and how much you want to keep in other investments, such as bond funds and cash. This mix is called your asset allocation.

If you get stuck, you can use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Robo-advisors will rebalance your investments as they shift out of the original allocation you chose, but if you're picking your own investments, this is something you'll need to do on your own.

What are the Roth IRA rules?

Once you've opened your account, there 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 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 Jun 27, 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

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Frequently asked questions

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.

This depends on where your Roth IRA is held. Roth IRAs that aren’t held at a bank do not have Federal Deposit Insurance Corporation insurance. Instead, assets in your brokerage account are protected by Securities Investor Protection Corporation insurance which, among other protections, offers up to $500,000 in protection for your Roth IRA if your broker fails financially and assets are missing.

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 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.

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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