What Is a Roth IRA? Basics To Know and How to Start One

Roth IRAs are retirement investment accounts that offer tax-free investment growth and tax-free withdrawals.
Elizabeth Ayoola
Tina Orem
By Tina Orem and  Elizabeth Ayoola 
Edited by Chris Hutchison Reviewed by Michael Randall

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Nerdy takeaways
  • Roth IRA retirement savings accounts offer lucrative tax benefits in the future.

  • For those eligible, a Roth IRA allows the money contributed to grow tax-free, with no tax on distributions.

  • IRAs have annual contribution limits of $6,000 in 2022 and $6,500 in 2023 (plus an extra $1,000 for those 50 or older).

Roth IRA meaning

A Roth IRA is an individual retirement account that has special tax advantages: Distributions from the Roth IRA in retirement are tax-free, because the money contributed is taxed. You can withdraw contributions to a Roth IRA without tax or penalty.

This is unlike a traditional IRA, which offers a tax deduction when you contribute but requires taxes owed on distributions in retirement.

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How does a Roth IRA work?

You contribute to a Roth IRA with after-tax dollars, which essentially means there is no immediate tax deduction or other tax benefit for contributing to the account. Once your account is funded, you can invest that money through the Roth IRA. Over a long time horizon, those investments will likely earn a return.

That's when the real benefit of the Roth IRA kicks in: Qualified withdrawals from the Roth IRA during retirement (defined here as after age 59 1/2) are tax-free, because you didn't receive a tax benefit when you funded the account. This includes all of the investment growth we just referenced, which would otherwise be taxed.

Additionally, because you paid taxes on the contributions before putting them into the Roth IRA, you can withdraw those contributions — but not investment earnings — at any time without additional taxes or penalties from the IRS.

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What are the Roth IRA contribution and income limits?

There's a hitch, which is that IRS sets income eligibility limits for Roth IRAs. You can fund a Roth IRA as long as your income is under the limits below; at higher income levels, the amount you're allowed to contribute is phased out and, eventually, eliminated completely.

Filing status

2022 or 2023 Income range

Maximum annual contribution

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

2022: Less than $129,000.

2023: Less than $138,000.

2022: $6,000 ($7,000 if 50 or older).

2023: $6,500 ($7,500 if 50 or older).

2022: More than $129,000, but less than $144,000.

2023: More than $138,000, but less than $153,000.

Contribution is reduced.

2022: $144,000 or more.

2023: $153,000 or more.

No contribution allowed.

Married filing jointly or qualifying widow(er)

2022: Less than $204,000.

2023: Less than $218,000.

2022: $6,000 ($7,000 if 50 or older).

2023: $6,500 ($7,500 if 50 or older).

2022: More than $204,000, but less than $214,000.

2023: More than $218,000, but less than $228,000.

Contribution is reduced.

2022: $214,000 or more.

2023: $228,000 or more.

No contribution allowed.

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

2022 and 2023: Less than $10,000.

Contribution is reduced.

2022 and 2023: $10,000 or more.

No contribution allowed.

If you don't qualify for a Roth IRA, you have the option of contributing to traditional IRA, then converting that account to a Roth IRA through a method called the backdoor Roth (also known as a Roth IRA conversion). This type of conversion allows you to transfer money from your traditional IRA into a Roth IRA, but you have to pay taxes on the money first. There are no restrictions on income limits or marital status for backdoor Roths, so anyone is eligible to open one.

Read our Roth IRA income limits and contributions guide for more details on Roth IRA income limits, rules and the exceptions to them.

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What are the benefits of a Roth IRA?

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 is lucrative.

Some other benefits of a Roth IRA include:

  • No required minimum distributions: Account holders of Roth IRAs aren't subject to the required minimum distributions required of traditional IRA or 401(k) accounts

    . (Beginning in 2023, these RMDs must start at age 73.) This means account holders don't have to take distributions from a Roth IRA at any point while they're alive, unlike with traditional IRAs or 401(k)s. However, it's worth noting that inherited Roth IRAs are subject to RMDs, unless you're inheriting it from a spouse. There are special rules in those circumstances.

  • No income tax on inherited Roth IRAs: If you pass a Roth IRA to a heir, they enjoy tax-free withdrawals as long as the account was held for at least five years at the time of the account holder's death.

  • Easy withdrawals: You can withdraw the money you contributed any time, without taxes or penalty. (You may be taxed or penalized if you withdraw investment earnings.)

  • Double dipping: You can contribute to a Roth IRA in addition to an employer retirement account like a 401(k).

  • Flexible timing: You can choose when and how much you contribute to a Roth IRA. For example, you could contribute the full limit on the first day of the year, or split up your contributions throughout the year.

  • Extra time to contribute: You have until that year's tax deadline to contribute for the previous calendar year — for example, if you still want to make Roth IRA contributions for 2022, you can do so until April of 2023.

  • Tax-free distributions: 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.

  • No age limit to open: You can open a Roth IRA at any age, as long as you have earned income (you can’t contribute more than your earned income).

How do you invest in a Roth IRA?

Investing in a Roth IRA is pretty straightforward once you've met the income requirements to contribute to the account. First, decide whether you want to do passive or active investing, and choose the best Roth IRA provider for your investing approach.

For example, if you aren't keen on the idea of constantly watching the stock market and trading, you may want to do passive investing and use a robo-advisor. Robo-advisors do all the work of choosing and managing investments for you based on your investing goals. If you enjoy managing your own investments, investing in individual stocks, or advanced investing strategies like day trading or options, then opening a regular Roth IRA brokerage account may be the better option.

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:

» Ready to get started? Read our step-by-step guide on how to open a Roth IRA

What are the Roth IRA rules?

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 1/2 years old, and who hold their accounts for at least five years, can take distributions, including earnings, without paying federal taxes.

    IRS. Traditional and Roth IRAs. Accessed Mar 17, 2022.

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 1/2, 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

What's the difference between a Roth IRA and a traditional IRA?

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. So, 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.

Frequently asked questions

A 401(k) and a Roth IRA are both valuable retirement savings tools, and there's good news: You don't have to choose. As long as you're eligible for a Roth IRA, you can contribute to that alongside an employer-sponsored retirement plan like a 401(k). But that, of course, requires having enough money to contribute to both, which isn't always possible. If you need to choose one place to direct your dollars, read our comparison of 401(k)s and IRAs.

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.

Many discount brokers and robo-advisors have $0 minimums to open a Roth IRA. You can see which ones in our roundup of best IRA providers. However, the tax perks of investing in an IRA start only when you start contributing money to the account. The IRS allows you to contribute up to $6,000 in 2022, or $7,000 if you’re age 50 or over, but you are not required to contribute the maximum. In 2023, you can contribute up to $6,500 or $7,500 if you're 50 and older.

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

Yes. You can put your 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.

The answer to that question depends entirely on the investments you choose within your Roth IRA account, as well as how those investments perform in the overall market. Many financial advisors assume an average annual return of between 6% and 8% — in some years you'll earn more; in others, you'll earn less or even see a decline in your balance. But over the long term, the stock market has proven to be one of the best ways to grow your money, and the average annual return of the market as a whole is around 10% before inflation.

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