Roth IRA: Definition & How to Open One

A Roth IRA is an individual retirement account to which you can contribute after-tax dollars. The money you invest grows tax-free, and once you're 59 1/2 and the account has been open for at least five years, you can withdraw from the Roth IRA without paying federal taxes.

» Ready to get started? See our top picks for the best Roth IRA accounts.

A Roth IRA account works by taking contributions of after-tax dollars from a qualifying source of earned income and investing it. Money contributed to your Roth IRA 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.

Unlike a 401(k) plan or a traditional IRA, you aren’t required to take required minimum distributions (RMDs) after a certain age. If you need the money in your Roth IRA before age 59 ½, 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.

For 2024, the contribution limit is $7,000 for those under 50 and $8,000 for those 50 and older. If your MAGI is below $146,000 (single filers) or below $230,000 (married filing jointly), you can contribute the full amount.

At incomes above that, your contribution limit becomes smaller, until it is eliminated completely. In 2024, no contribution is allowed for single filers who make $161,000 or more or those married filing jointly with incomes of $240,000 or more.

» Dig deeper: Read our full guide to Roth IRA income and contribution limits.

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:

• Individual stocks.

• Individual bonds.

• ETFs.

• Index funds.

• Mutual funds.

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.

» Shop around with our picks for the best online brokers.

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.

» See our picks for the best robo-advisors.

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. » View our list of the best Roth IRA accounts

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 59 ½ years old and who have held their accounts for at least five years can take distributions, including earnings, without paying federal taxes^[0]

  Internal Revenue Service. Traditional and Roth IRAs. Accessed May 1, 2024.

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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, and having a baby or adopting. Be sure you understand all the rules of these exceptions.

» Get full details on Roth withdrawal rules.

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.

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.

The main difference between a Roth IRA and a traditional IRA is how they're taxed. Roth IRAs give you tax-free withdrawals in retirement, while traditional IRAs can 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.