Guides IRA 101

What Is a Roth IRA?

Arielle O'Shea
January 17, 2019

The Roth IRA is a retirement account that offers valuable tax benefits, including tax-free growth on your investments. But not everyone qualifies — it all depends on your income.

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Understanding Roth IRAs

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? Learn how to open a Roth

What are the benefits of a Roth IRA?

  • In 2018, it allows for contributions of up to $5,500 per year — or $6,500 if you are 50 or older — and you can use it in addition to a 401(k). (Those limits increase to $6,000 and $7,000 in 2019.)

  • 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.

  • 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.

Are you eligible for a Roth IRA?

Here’s the one downer: You won’t be eligible for a Roth if you earn too much.

In 2018, the amount you can contribute to a Roth IRA begins to dwindle at certain thresholds for modified adjusted gross income. The contribution limit then phases down as income rises until your ability to contribute is eliminated completely. See IRA contribution limits for more details, or open the collapsible below to see the latest thresholds.

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 employ 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 mutual fund selections and no account minimums.

» Want the deep dive? See our comprehensive analysis of the Best Roth IRA account providers.

Nerdy Math: Can you retire on $1 million?

People are drawn naturally to round numbers, and with its six zeros, $1 million is a rounder figure than most. But is it enough to fund a comfortable retirement?

It’s a complicated question that depends heavily on your lifestyle, location and life expectancy. To get a sense of how far most Americans think $1 million will take them in retirement, NerdWallet commissioned a study, conducted online by The Harris Poll, of more than 2,000 U.S. adults in June 2018.

What we found: Half of Americans (50%) believe $1 million is enough to retire on, while 31% say it would not be enough. Nineteen percent are not sure if it is enough.

We also asked Americans whether they expect to hit that $1 million milestone. Most were skeptical that they’d hit the mark:

  • Just 27% of Americans think their retirement savings will reach $1 million.

  • Nearly half — 48% — do not believe their savings will hit that level. Again, 19% were unsure if they would save enough to hit $1 million.

  • Men are significantly more likely to believe they’ll accumulate $1 million in savings, with 35% expecting to hit that figure compared to just 20% of women.

  • Thirty percent of baby boomers (ages 54-72) think their savings will reach $1 million while post-millennials (ages 18-21) and millennials (ages 22-37) are both more likely than their older counterparts to be unsure about whether they’ll hit that level (33% and 26% vs. 15% of those ages 38+).

Overall, only 32% of Americans say they’re confident they’ll have enough money saved for retirement by their desired retirement age based on their current rate of savings. Making use of tax-advantaged retirement accounts — including workplace retirement plans and a Roth IRA — can help you join that group.

And as for how much to contribute to those accounts? Use a retirement calculator to get a personalized goal, then motivate yourself to reach it. One fun way to do that is figuring out when your nest egg will hit that coveted $1 million mark. You can use the calculator below to estimate when you’ll unlock the seven-figure badge. (We’d tell you to circle the date on your calendar, but 2040 versions aren’t out yet.)

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from June 14-18, 2018, among 2,024 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact Megan Katz at mkatz@nerdwallet.com.