What Is a Roth IRA? Rules & How to Open One
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Table of contents
- What is the Medicare tax?
- What is a custodial Roth IRA?
- What is a budget?
- Still deciding on the right carrier? Compare Medigap plans
- 6 steps to opening a Roth IRA
- What is a W-4?
- See how to get your business started quickly
- What is a 1040 form?
- Key takeaways
- About this tool
- Bizee: Easily form your new business
- What is a home equity line of credit?
- What is a rollover IRA?
- What is the average stock market return?
- Chubb small-business insurance
- What are dividend stocks?
- The difference between Roth and traditional IRAs
- About USAA home insurance
- What is a debt collector?
- What is a credit freeze?
- What is equipment breakdown coverage?
- Is the U.S. economy growing?
- Calculate your conventional loan payment
- What is a target-date fund?
- 7 of the best apps to make money
- What is the Medicare tax rate?
- S&P 500 index (SPX) today
- If you’re in a rush, turn the card in
- The Equal Credit Opportunity Act
- What is an accredited investor?
- What is self-employment tax?
- What is SSDI?
- Step 1: Choose your health insurance marketplace
- Making money with Rover
- Mortgage options
- How voluntary repossession works
- What is Founderscard and how much does it cost?
- What is a Roth IRA account?
- 1. Shine a bright light on your portfolio
- What to look for in a health insurance plan
- 7 best-performing AI stocks
- United fare classes: The differences
- Federal Student Aid Estimator
- First, some background
- 1. Set your budget
- Custodial Roth IRA rules
- Consequences of transcript withholding
- What does this value mean?
- 1. Rewards rates are generous
- Best visitor insurance for parents visiting USA
- How we found the best travel insurance
- Auto insurance
- How to stay near California’s national parks on points
- Why is having a low credit utilization important?
- What is the child and dependent care tax credit?
- Most profitable small businesses
- What are AI ETFs?
- January
- What it means to default on a credit card
- What is ChexSystems?
- Frugal food tips
- You should feel good about buying a house if …
- What types of passport services are available?
- Late winter and early spring
- What happens when you get a credit card refund?
- How do credit union loans work?
- What is the average credit score by age?
- What are tax refund advance loans?
- Investing through an HSA
- What does equipment breakdown insurance cover?
- HELOCs and home equity loans compared
- 6 ways to buy Bitcoin
- What is a conventional loan?
- What other airlines charge for pet fees
- The best money-making apps
- What does it mean to invest in the S&P 500?
- Best no medical exam life insurance for March 2024
- The self-employment tax rate for 2023
- Roth vs. traditional IRA
- What is a business credit score?
- Breakdown of central air costs
- What is the child tax credit?
- Summary of cash advance apps
- The best online life insurance companies of March 2024
- Wells Fargo Active Cash® Card
- How to freeze your credit with all 3 bureaus
- How do expense trackers work?
- Who needs to fill out a Form 1040?
- How to make money online
- Roth IRA vs. traditional IRA: What's the difference?
- The case for secondhand gifts
- What’s a good credit score with FICO vs. VantageScore
- What are the advantages of a sole proprietorship?
- Can you pay student loans with a personal loan?
- Mint vs. NerdWallet at a glance
- Key takeaways
- Banks that offer joint business accounts
- Options for an old 401(k)
- Business checking accounts with no ChexSystems
- Investment account types
- What is the 10-year Treasury?
- What to know about American Airlines Landline
- Other Medicare tax details to know
- 20 high-dividend stocks
- If you have a few minutes, call the credit card company
- What’s the purpose of a budget?
- Who qualifies for SSDI?
- Banking
- How to fill out a W-4
- Mistake No. 1: I used it outside Target — frequently
- How do debt consolidation loans help you pay off debt?
- How to lower your credit utilization
- How they stack up
- What is a life insurance policy?
- The average stock market return isn't always average
- Chubb business insurance: Pros and cons
- Top target-date funds with low costs for 2024
- Strides in the workplace
- Calculator: Convert Frontier miles to dollars
- Where USAA stands out
- Best car insurance in New Jersey overall: Travelers
- How we ranked the top life insurers
- Top 5 travel benefits for Founderscard members
- How to calculate your home equity
- How does ChexSystems work?
- What is the U.S. unemployment rate?
- Keep rewards in context
- How we calculate your monthly conventional loan payment
- Where do I cash in a savings bond?
- How to open a custodial Roth IRA for kids
- The self-employment tax rate for 2024
- Roth vs. traditional IRA: How to choose
- 1. Brigit: Best for budgeting tools
- Billing error
- How voluntary repossession affects your credit and finances
- Take advantage of the triple tax benefit
- How much is the child and dependent care credit worth?
- Best AI ETFs by one-year performance
- Best car insurance in Georgia overall: Travelers
- 2. Open and update your individual retirement accounts
- Today’s HELOC rates
- Stackable savings at select grocery stores
- How to transfer a 401(k) to IRA
- Frugal shopping tips
- Chubb small-business insurance
- JSX pet policies
- What is a mega backdoor Roth?
- 2. Shop for a loan
- How we ranked the top life insurers
- What if someone claims you have their card?
- Holiday weekends
- 2. Redemption options are varied
- Step 2: Compare types of health insurance plans
- How much is the 2023 child tax credit?
- Best credit union personal loans for 2024
- Information you need to freeze your credit
- How does a Roth IRA work?
- What isn’t covered by equipment breakdown insurance?
- February
- Options if you’ve already defaulted
- Investing for income: Dividend stocks vs. dividend funds
- Pop culture
- How do you become an accredited investor?
- How has the value changed over time?
- How are business credit scores calculated?
- Where USAA falls short
- How long does it take to get a credit card refund?
- Where to get tax refund loans
- Pros and cons of debt consolidation loans
- What is the 10-year treasury yield today?
- Our Nerdy Picks
- Should I buy stocks when markets are at all-time highs?
- What can you do if your school is withholding your transcript?
- How to calculate self-employment tax
- Why is budgeting important?
- Best instant life insurance companies: Pros and cons
- What is debt collection?
- Best iOS personal expense tracker apps
- Other alternatives to Mint
- Look for a card with a 0% APR period
- How to use the conventional mortgage calculator
- What is a second chance business account?
- 5-year, 10-year, 20-year and 30-year S&P 500 returns
- 5 reasons why a Roth IRA can be right for minors
- First things first: Check your IRA eligibility
- State availability
- Prepare for long-term care
- Types of AI ETFs
- What documents do I need to cash a savings bond?
- If Great Lakes reported your account in error during auto forbearance
- Net price calculators
- Mega backdoor Roth 2024
- What not to do
- How flexible are Frontier miles?
- Will your disability benefits change when you turn 65?
- Child tax credit 2024
- Credit cards
- Who is a qualifying dependent?
- How to fill out a 1040 form
- What’s the difference between equipment breakdown coverage and a home warranty?
- About home equity loans
- Should you use a personal loan to pay off student loans or refinance?
- Is inflation going down?
- Why invest in target-date funds
- 3. Determine other ownership costs
- Who has to pay self-employment tax?
- How do you start a budget?
- What can you do if the merchant won’t provide a refund?
- Best car insurance in New Jersey for your budget: Geico
- Episode transcript
- How to avoid voluntary repossession
- Does debt collection affect your credit score?
- Best Georgia car insurance for your budget: Auto-Owners
- March
- What are AI stocks?
- About Medicare
- Best no-exam life insurance policies in 2024
- All year
- 3. Get revved up with this welcome bonus
- Do personal credit scores affect business credit scores?
- USAA home insurance coverage
- Best travel insurance overall: Berkshire Hathaway Travel Protection
- 2. Empower: Best for fast cash
- How long will your mortgage loan last?
- How to buy AI ETFs
- How to buy a life insurance policy
- What can you invest in with a Roth IRA?
- Bonus cash back on memberships at gyms and fitness clubs
- Frugal entertainment tips
- How did we determine the value of Frontier miles?
- Child tax credit expansion: What the tax deal could mean for you
- Does age affect your credit score?
- Regret or user error
- How long do you stay on ChexSystems?
- Pay it off before the promotional period ends
- Price vs. yield
- How to invest in the S&P 500 in two steps:
- Why do you have to be an accredited investor?
- How to unfreeze your credit
- What a good credit score can get you
- Dealing with the fallout and moving forward
- Who can open a joint business account
- Is it worth it to cash a savings bond?
- What to expect the stock market to return
- Why JSX might be right for your pet
- 4. Find the right car for you
- What’s next?
- When voluntary repossession makes sense
- Are debt consolidation loans a good idea?
- Pay yourself back later
- Are Roth IRAs insured?
- Tips for secondhand gifting
- Relaxing rewards at the spa and salon
- What to do if you’ve been denied a business account
- How target-date funds work
- How to pay self-employment tax
- Do you have to contact anyone to switch from SSDI to Social Security?
- What is a good business credit score?
- Making money with Wag
- What do I need to fill out Form 1040?
- Which life insurance policy is right for me?
- Can I get a bank account if I’ve been denied?
- Chubb commercial insurance
- Contact Nelnet customer service if you have questions about your Great Lakes loans
- Next steps to determine how much financial aid you can get
- Your 401(k) plan allows after-tax contributions
- How much should you spend on a mattress?
- 4. Intro APR period is short
- Why the Roth IRA works for many savers
- Who covers the purchase while the refund is pending?
- Mistake No. 2: I maxed it out
- Eligible child and dependent care expenses
- What’s a spousal Roth IRA?
- April
- About home equity lines of credit
- How does a HELOC work?
- Frugal DIY project tips
- How to invest in dividend stocks
- USAA home insurance rates
- Best car insurance in New Jersey for customer satisfaction: NJM
- How to deal with debt collection
- Bank of America® Customized Cash Rewards credit card
- Best Georgia car insurance for customer complaints: Country Financial
- How much does equipment breakdown coverage cost?
- Other ways to pay off student loans
- How to apply for a joint business bank account
- Factors that affect your conventional loan payment
- How to improve your ChexSystems report
- Do I pay taxes when I cash in savings bonds?
- Next steps
- Tax deductions for self-employment
- What is a good credit score for your age?
- 3. EarnIn: Best for large advances
- W-4 form 2024
- Dissatisfaction
- Use rewards points for home-related items
- Your 401(k) lets you move your after-tax money
- 5. Contact the seller or visit a dealership
- Mattress-buying tips
- Should you claim early Social Security benefits?
- Should I file taxes now or wait for the child tax credit expansion?
- Do debt consolidation loans hurt your credit score?
- Hack your IRA
- 3. Don’t fear stock market exposure
- What affects your credit score?
- How to invest in AI stocks
- Additional functionality
- Is United’s basic economy worth it?
- How to store the Bitcoin you buy
- Why is the 10-year Treasury yield important?
- How to make an appointment at a passport agency
- Can nonaccredited investors invest?
- What happens to rewards earned from the purchase?
- How do tax refund loans work?
- Download Form 1040
- Is equipment breakdown coverage worth it?
- Card details: Chase Freedom Flex℠
- Should you purchase Chubb business insurance?
- 5. It charges foreign transaction fees
- How to open a Roth IRA in 6 steps
- May
- You should probably postpone buying a house if …
- How to invest in target-date funds
- Can you collect SSI and Social Security disability or retirement benefits?
- Discounts
- How quickly could the IRS implement the child tax credit expansion?
- How to find the 2024 W-4
- Types of mortgage loans
- How much life insurance should I buy?
- Best Georgia car insurance for ease of use: State Farm
- When will interest rates go down?
- Know discounts, downsides of store-specific cards
- Frugal home expenses tips
- Step 3: Compare health plan networks
- Best for emergency medical coverage: Allianz Global Assistance
- Best car insurance in New Jersey for ease of use: State Farm
- Credit union personal loan rates
- Who counts as a qualified care provider?
- How to freeze your child’s credit
- How to get a good credit score
- Taxes for rollover IRAs: 2 rules to know
- Are 10-year Treasury notes a good investment?
- You’ve got money left over for savings
- How much does it cost to invest in the S&P 500?
- 6. Inspect and test-drive the car, if applicable
- Fraud
- How to qualify for a debt consolidation loan
- Next steps:
- Which Form 1040 schedules should I use?
- How to find AI ETFs
- Ready to get started?
- How to complain about Great Lakes
- Does getting a refund on a credit card hurt your credit?
- Requirements: Who qualifies for the child tax credit?
- 4. Varo: Best for existing bank customers
- Top pick: The American Express® Green Card
- What else you need to know
- Making the call
- 3 tips to control central air conditioning installation costs
- How to check your credit score
- Do I have to update my W-4 every year?
- Mistake No. 3: I used retirement money to pay it off
- Alternatives to Chubb business insurance
- Why flying JSX still might not make sense
- U.S. passport agency locations
- Consumer complaints
- Full list of the best car insurance companies in Georgia
- June
- HELOC requirements
- How do you buy 10-year Treasury notes?
- How much does a tax refund loan cost?
- Additional child and dependent care credit requirements
- When should you freeze your credit?
- How’s the stock market doing?
- Pay with savings to avoid interest
- Should you fly JSX with your pet?
- Bottom line
- 7. Determine which warranties are right for you
- Best custodial Roth IRAs
- Full list of the best car insurance in New Jersey
- How to get a loan from a credit union
- 'Holds' on a credit card
- Best Android personal expense tracker apps
- How much do life insurance policies cost?
- Can you open a business account with no credit check?
- How to settle a dispute with Great Lakes
- Why do I need a business credit score?
- Consumer experience
- Additional child tax credit
- How to adjust your Form W-4
- How to get a home equity line of credit
- Do you pay tax on T-notes?
- How to get a debt consolidation loan
- Could we be in an AI bubble?
- What to do with the Bitcoin you buy
- Are these the best dividend stocks?
- Step 4: Compare out-of-pocket costs
- 5. Dave: Best for repayment flexibility
- Cons of a credit freeze
- July
- Next Steps
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- How do I get my business credit score?
- Best for travelers with pre-existing medical conditions: Travel Guard by AIG
- Why you can trust NerdWallet
- How to finance central air installation
- Pros and cons of tax refund loans
- U.S. Bank Cash+® Visa Signature® Card
- What are the disadvantages of sole proprietorship?
- Can you get a passport in one day?
- 8. Negotiate the best price
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- Rover vs. Wag: Which dog-walking app should I choose?
- How much can you borrow with a HELOC?
- Can you contribute to a rollover IRA?
- USAA vs. competitors
- Alternatives to the best instant life insurance
- Mistake No. 4: I cut up the credit card and stopped using it
- How to claim the child tax credit in 2024
- Anti-fraud preauthorizations
- How to claim the child and dependent tax credit
- Credit freeze or credit lock?
- Other types of 1040 tax forms
- Should I invest in an S&P 500 index fund or S&P 500 ETF?
- What is no-exam life insurance?
- Other ways to consolidate your debt
- What is the perfect credit score, and how many people have it?
- August
- As a last resort, contact your member of Congress
- 6. MoneyLion: Best for existing customers
- Tax refund loan alternatives
- 9. Maximize trade-in value, if applicable
- Important considerations when opening a Roth IRA
- What not to do
- More about top-rated life insurance companies
- Who can access your frozen credit reports?
- Compare top-rated life insurance companies
- Should you invest in AI stocks?
- Final thoughts on the different United economy fare classes
- More great park experiences in California
- How to get a passport in 24 hours
- When to expect your child tax credit refund
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- Bottom line: Is it worth claiming the child and dependent care tax credit?
- If you’d like to get a Founderscard membership
- After deciding
- Are there drawbacks to investing in the S&P 500?
- Alternatives to no medical exam life insurance
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- 10. Make the purchase
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- If you're ready to start a budget
- 7. SoLo Funds: Best for peer-to-peer cash advances
- Lenders that offer small loans and fast funding
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- Step 5: Compare benefits
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- Methodology
What is a Roth IRA account?
A Roth IRA is an individual retirement account that takes after-tax dollars, then provides tax-free growth and withdrawals in retirement. Once you're 59 1/2 — and the account has been open for at least five years — you can withdraw from your Roth IRA without paying federal taxes.
» Ready to get started? See our top picks for the best Roth IRA accounts.
Roth IRA vs. traditional IRA: What's the difference?
The main difference between a Roth IRA and traditional IRA is how they're taxed. Roth IRAs give you tax-free withdrawals in retirement, while traditional IRAs give you a tax break when you contribute.
You can have both a Roth IRA and a traditional IRA, and your contribution strategy can depend on your needs and retirement plans. If you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, Roth IRAs might be a better option for you. You can read our Roth IRA vs. traditional IRA article to learn more about the differences.
» Learn more: Find the best IRA account for you
How does a Roth IRA work?
A Roth IRA works by taking after-tax dollars from a qualifying source of earned income. Money contributed to your Roth IRA could come from a job, but could also be a rollover from a Roth 401(k) plan, conversion from an existing traditional IRA or 401(k) plan, a spousal contribution, or other transfer. (More on these options below.)
Then, you’ll need to choose a broker to open your Roth IRA and select where you want to invest the money. Over a long time horizon, those investments could earn a return.
That’s where the real benefit of the Roth IRA kicks in: Your investment growth could have been taxed when it was time to withdraw the money, but because you didn’t receive a tax benefit when you funded the account, you’ll get the money tax-free. And, unlike a 401(k) or a traditional IRA, you aren’t required to take required minimum distributions (RMDs) after a certain age.
And if for some reason you need the money in your Roth IRA before retirement, 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: Use our free Roth IRA calculator
What can you invest in with a Roth IRA?
There are several types of securities you could invest in using your Roth if you choose a more hands-on approach to investing. Some of them include:
Are Roth IRAs insured?
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’s a spousal Roth IRA?
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 you need to know about spousal Roth IRAs
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How to open a Roth IRA in 6 steps
1. Find out if you're eligible.
Roth IRAs have income limits, so anyone can have a Roth IRA, but the ability to contribute depends on your annual income. At higher levels, that amount is phased out and, eventually, eliminated.
For 2024, the contribution limit is to $7,000 if your MAGI is below $146,000 (single filers) or $230,000 (married filing jointly. The max contribution amount goes up $1,000 if you’re 50 or older.
At incomes above that, your contribution limit begins to phase out, until it is eliminated completely at $161,000 for single filers in 2024 and $240,000 for those married filing jointly in 2024.
» Dig deeper: Read our full guide to Roth IRA income and contribution limits
2. Decide what type of investor you are.
If you're a “do-it-yourself” investor, choose a brokerage.
You can open a Roth IRA at an online broker and then choose your own investments. This may be simpler than you think — you can build a diversified portfolio with just three or four mutual funds that are in different asset classes. When comparing brokers, look at trade commissions and the investment fees of their offered funds (also called expense ratios).
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, 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 small fee for the service, but their fees generally are far lower than a human financial advisor.
3. Choose how much you want to invest.
How much do you need to open a Roth IRA? While there generally isn’t a fee for opening a Roth IRA, there may be other costs and requirements depending on your provider and selected investments. Some brokers and robo-advisors — but not all — may require a minimum amount to open an account with them, or charge trading commissions when investments are bought and sold.
Think about your budget, your time horizon, and investing goals, and consider investing only money you won’t need in the next five years. That way, you have time to ride out any highs and lows of the market.
4. Select a provider to open your Roth IRA.
The next step in how to open a Roth IRA is to find a home for your account.
If you're a 'do-it-yourself' investor, opening a Roth IRA at an online broker makes a lot of sense. At the best brokers, you’ll find a large list of low-cost investments to choose from, including index mutual funds and exchange-traded funds. The top brokers also offer extensive retirement planning tools, robust customer service and reasonable account minimums and fees. And you maintain complete control over how your retirement funds are invested.
For 'hands-off' investors, or those who want to invest for retirement but don’t want to worry about managing their portfolio over time, a robo-advisor is an easy choice. 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 amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who seek a less volatile investment account.
As an investor, all you have to do is open your Roth IRA, link your bank account and follow the steps the provider uses to build your portfolio. The robo-advisor then purchases the investments for you and manages the account over time.
Many robos also offer 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. (Robo-advisors generally are registered investment advisors, operating under a similar structure to human investment advisors.)
5. 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 account.
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.
6. Pick your investments.
The last step in learning how to open a Roth IRA is to decide how to invest the money in the account. That's because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that money 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 riskier investments, such as stock funds, and how much you want to keep relatively safe in, for example, bond funds and cash. This mix is called your asset allocation.
And if you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Be sure to rebalance the investments as they shift out of the original allocation you decided on, because you won’t have robo-advisors to do it for you.
What if you're not eligible?
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 and then convert it 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
What are the Roth IRA rules?
Once you've opened your account, here 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 59 ½ years old, and who have held their accounts for at least five years, can take distributions, including earnings, without paying federal taxes.
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 59 ½, 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 59 1/2 include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, having a baby or adopting. Be sure you understand all the rules of these exceptions.
» Get a better understanding of Roth withdrawal rules
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