If you're ready to save for retirement but don’t know how to start, a Roth IRA should be your first stop. It’s one of the only accounts that can give you a tax-free income stream during retirement. On top of that, it offers a level of flexible access to your savings that other retirement accounts can’t touch.
But before you open a Roth IRA, it’s important to know how they work. From income and annual contribution limits to when and how you make withdrawals, knowing the ground rules can help you save with confidence.
What is a Roth IRA?
A Roth IRA is a tax-advantaged personal retirement account where you make contributions using after-tax dollars—that is, money you’ve already paid taxes on. While you can’t deduct Roth IRA contributions from your taxes as you might with a traditional IRA, the Internal Revenue Service (IRS) catches you on the flip side: Your contributions grow tax-free, and withdrawals during retirement are also tax-free.
Unlike a 401(k) or other employer-provided retirement plan, you open a Roth IRA on your own. You can find Roth IRAs at any number of brokerages and invest in a wide variety of asset types, such as stocks, bonds, mutual funds, ETFs, and alternative assets like commodities or real estate.
And while there are restrictions around withdrawing your earnings (keep reading to learn more), you get one major benefit with a Roth IRA that no other IRA can provide: penalty-free access to your contributions. At any time and for any reason, you can withdraw up to the amount you’ve contributed. However, you should approach any withdrawal before retirement with caution. Despite their flexibility, Roth IRAs are designed for long-term savings, and tapping savings early could jeopardize your later-in-life goals.
How does a Roth IRA work?
To open a Roth IRA, you simply need to choose a provider—such as an online brokerage or robo-advisor—and make your first contribution using money in your bank account.
Once you fund a Roth IRA, you’ll either select your own investments or be placed into a portfolio that aligns with your time horizon and risk tolerance—which is generally the path with robo-advisors.
Over the years, you’ll continue to contribute to your Roth account, and your retirement savings should grow. Then, when you reach retirement, you can start taking withdrawals the years. And since you already paid taxes on the money you contributed, your withdrawals during retirement are tax-free.
That tax-free income can add some certainty to your retirement years, improving your ability to budget for day-to-day expenses and splurges alike. And when you have a Roth IRA in addition to another retirement account like a traditional 401(k) or 403(b) plan, you can mix and match taxable and tax-free withdrawals to keep your total tax bill down.
“We have a great probability that we're going to be at higher future tax rates,” says Nicholas Yeomans, CFP® and president of Yeomans Consulting Group in Marietta, Ga. “So having tax diversification, where you're allocating part of your money to be tax-free forever, makes all the sense of the world.”
While you can withdraw your Roth IRA contributions without penalty at any time, you could face a penalty if you withdraw earnings early. Typically, the penalty is 10%, but that penalty is waived if the withdrawal is for qualified higher education expenses, says Jeffrey Wood, a certified public accountant and certified financial planner with Utah-based Lift Financial. But despite no penalty, there’s a catch: potential taxes.
“There would be tax required on the withdrawal of earnings, even in a Roth IRA, since the withdrawal is for an individual under age 59½,” says Wood. He adds that qualified education withdrawals from a Roth can be made for yourself, your spouse, children, or grandchildren.
Roth IRA income and contributions limits
When you save for retirement using a Roth IRA, you need to know about two types of IRS-imposed limits: income limits and annual contribution limits. They rule whether you can contribute in a given year and how much.
Roth IRA income limits
Roth IRAs have income limits, which means not all savers will be able to use this type of retirement account for their savings. Limits are set annually by the IRS, so you’ll want to confirm in January of each year that you still qualify to make contributions.
There are three income limits: one that lets you make the full annual contribution, one that only allows a partial contribution, and one where you can’t contribute at all. The income limits depend on your tax filing status.
| Roth IRA income limits 2023 | ||
| Tax filing status | Income range for 2023 | You can contribute |
| Single, head of household, or married filing separately | Less than $138,000 $138,000 or more but less than $153,000 $153,000 or more |
$6,500 ($7,500 if 50+) A reduced amount $0 |
| Married filing jointly or qualifying widow(er) | Less than $218,000 $218,000 or more but less than $228,000 $228,000 or more |
$6,500 ($7,500 if 50+) A reduced amount $0 |
| Married filing separately (if you lived with spouse during year) | Less than $10,000 $10,000 or more |
A reduced amount $0 |
If you want some help determining whether you can contribute to a Roth IRA, Worksheet 2-2 from the IRS can guide you through the necessary calculations.
Roth IRA contribution limits 2023
Like all IRAs, Roth IRAs have annual contributions limits set by the IRS. For 2023, you can contribute up to $6,500. If you’re age 50 or older, you get to add an extra $1,000 to that number for a total of $7,500.
It’s also important to note that it’s not an impossible scenario where you might have multiple IRAs at some point—perhaps a Roth and a traditional IRA. The annual contribution limit is cumulative and includes contributions to all of your IRAs. For instance, if you are 35 and have two IRAs in 2023 and contributed $4,000 to your Roth, you could only contribute $2,500 to your traditional IRA.
You have until the tax filing deadline of the following year to make contributions to your Roth IRA. For the 2023 tax year, the deadline for all IRA contributions is April 15, 2024.
If you make too much to contribute to a Roth IRA
If your income increases and you’re no longer eligible to contribute to a Roth IRA, you could still have access to Roth benefits.
For instance, you could consider a strategy called a Backdoor Roth IRA, which involves making a nondeductible traditional IRA contribution and then converting that money to a Roth IRA. However, you’ll want to reach out to a tax professional for guidance, as it’s possible to trigger unintended tax consequences if you fail to do the conversion properly.
You can also see if your employer’s 401(k) plan has a Roth option. Unlike Roth IRAs, Roth 401(k)s don’t have income limits, so you could score Roth benefits from your workplace retirement plan.
Roth IRA withdrawal rules
Again, Roth IRAs can be tricky since they have several moving parts—withdrawals being one of them. Learning the different rules that govern withdrawals will help set you up for success and avoid penalties when you need to access funds.
Withdrawing contributions
Since you can withdraw contributions to your Roth IRA without penalty at any time, a Roth can serve as a “reserve” to help pay for expenses other than retirement.
Education expenses
Whether for yourself or a child, you can use a Roth IRA to pay for school. Since withdrawals for qualified educational expenses are tax- and penalty-free, you could use your Roth to pay for college. A Roth can often be more flexible than a 529 plan, and funds that aren’t used for school can jumpstart a child’s retirement savings.
Emergency cash
While you should always look outside of your retirement accounts when you’re strapped for cash, your Roth IRA could help out if your emergency fund runs out. Using some of the funds in your Roth to cover sudden expenses could make sense and help you avoid taking on expensive, high-interest debt like credit cards or a payday loan.
Use caution
Anytime you make withdrawals from your Roth IRA, it’s best to proceed with caution. Not only can withdrawing money mean forfeiting the tax-free growth your Roth would otherwise provide. If you’re not careful, you could accidentally trigger taxes and penalties if you accidentally withdraw earnings.
“The trap people get into is if they don't do a great job of accounting. It's easy to mess that up and blow up your Roth IRA,” says Yeomans. “I've seen countless times where people took more than what they were allowed to take, and next thing you know, they're paying 10% penalties on all their gains.”
The five-year rule
For a Roth IRA withdrawal to be qualified, meaning that the earnings can be withdrawn tax and penalty-free as well, you typically need to be at least age 59½ and have held the Roth IRA for at least five years.
That five-year clock starts on January 1 of the year for which your first contribution was made, even if that contribution technically happens the following year.
“Let's say that you're maybe later to the game with a Roth IRA, you've just found out about them,” says Jacob Barr, CFP and CRPC with Great Waters Financial in Duluth, Minn. “What you can do is make a contribution for, let's say, 2022, up until April of 2023. And that's going to allow you to get that clock started sooner.”
Non-qualified withdrawals
Non-qualified withdrawals are typically withdrawals that are made before you have met the five-year rule or before you’ve reached age 59½. But you can also make qualified withdrawals if you are disabled, if you are purchasing a first home (up to $10,000 lifetime), or to your heirs upon your death, as long as you have satisfied the five-year rule.
If you make a non-qualified withdrawal, the earnings you withdraw will be taxed as regular income and will also be subject to an additional 10% tax.
Roth IRA pros and cons
Roth IRAs are incredibly powerful and flexible accounts, but they’re not without their downsides.
Pros
- Tax-free qualified withdrawals. As long as you meet the criteria for qualified withdrawals, you can access your money completely tax-free.
- Flexible access to contributions. Penalty-free access to contributions could help if an emergency comes calling.
- No RMDs. Unlike 401(k)s and traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs).
Cons
- Income limits. Many people will exceed the limits and not qualify to contribute.
- Contributions aren't tax-deductible. Unlike a traditional IRA, you can’t deduct your contributions from your taxable income.
- Qualified withdrawal restrictions. You typically have to be age 59½ and meet restrictions of the five-year rule to make tax-free withdrawals.
Should you open a Roth IRA?
Before opening a Roth IRA, it helps to weigh the pros and cons. It’s an attractive arrangement, tax-free income during retirement, but a Roth isn’t right for everyone.
A Roth IRA might be a smart choice if...
- You meet the income limits and don’t have a 401(k) with a match at work
- You anticipate being in a higher tax bracket during retirement
- You want flexible access to your contributions
A traditional IRA might be a better choice if...
- You don’t meet the income qualifications for a Roth IRA
- You need the tax deduction for contributions to your IRA
- You anticipate being in a lower tax bracket during retirement than today
And don’t forget: You can have more than one IRA. You can always open a Roth IRA today and save up what you can while your income qualifies. Then, when your career takes off and your income increases, you can open a traditional IRA and keep saving for retirement there.
The great thing about IRAs is you have choices—and they’re all pretty dang favorable.
Frequently asked questions about Roth IRAs
When can I withdraw money from a Roth IRA?
You can withdraw your contributions from a Roth IRA at any time and for any reason without tax or penalty. Earnings can be withdrawn tax-free if you are 59½ and have met the five-year rule.
Who can contribute to a Roth IRA?
Anyone can contribute to a Roth IRA as long as they or their spouse have earned income below the IRS limits.
Is a Roth IRA tax-deductible?
Unfortunately, contributions to a Roth IRA aren’t tax-deductible. However, your withdrawals during retirement are tax-free.
