10 Min Read | Jan 22, 2024
By Ramsey
By Ramsey
If you’re thinking of opening a Roth IRA, you’ve probably got questions. What is a Roth IRA exactly, and how is it different from a traditional IRA? How does a Roth IRA work? Am I even eligible?
If you’ve got questions, that means you’re being intentional when it comes to your money. And that’s a good thing! You always want to learn everything you can about an investment (or in this case, an investment account) before you commit to putting your money into it.
So, let’s go over everything you need to know about a Roth IRA and why it’s a great way to start growing your retirement savings. Ready to jump in? Let’s do it.
What Is a Roth IRA?
ARoth IRA(aka Individual Retirement Account) is a retirement account that lets you save up to a certain amount each year for retirement.It really is the rock star of retirement accounts! Roth IRAs are easy to set up, simple to maintain, and come with tax advantages that help you build wealth and boost your retirement savings over the long haul.
In fact, we’rebigfans of a Roth IRA because of those tax advantages—they’re the main difference between a Roth IRA and a traditional IRA. While a Roth IRA doesn’t offer any current-year tax benefits like a traditional IRA, it gives you something even better: tax-free growthandtax-free withdrawals once you retire. Now, that’s a sweet deal!
Key Takeaways
- A Roth IRA is a retirement account that lets you invest after-tax dollars now so you can make tax-free withdrawals for retirement after the age of 59 1/2.1
- The 2024 Roth IRA income limit for single filers is $161,000 ($240,000 for married filing jointly).2
- For 2024, the Roth IRA contribution limit is $7,000 ($8,000 if you’re 50 or older).3
- Unlike a traditional IRA, which requires you to start taking withdrawals at age 73, a Roth IRA has no required minimum distributions (RMDs). That means you can leave your money in a Roth IRA to grow longer.4
- Qualified beneficiaries can take withdrawals from an inherited Roth IRA at any time without being penalized, but they may still have to pay taxes on earnings.5
How Does a Roth IRA Work?
A Roth IRA is an after-tax investment account. That means when you put money into your Roth IRA, you’ve already paid taxes on it. Why is that important? Because it means you won’t pay any taxes on that money in retirement.Andall the growth on your contributions will be tax-free too.
That’s a huge deal, worth repeating: Any withdrawals you make after age 59 1/2 aretax-free, as long as you’ve had the account more than five years.5More on that five-year rule in a bit.
Before we get into the details, keep a couple of things in mind. First of all, a Roth IRA isn’t an investment in itself—think of it as an umbrella that covers your investments and protects them from taxes. You can put all kinds of different investments into your Roth IRA.
The second thing to remember is that a Roth IRA is separate from your employer-sponsored retirement savings plan. Some employers offerRoth 401(k) plans. You can learn about the difference between a Roth IRA and a Roth 401(k) in the FAQ section at the end of the article.
What Are the Benefits of a Roth IRA?
Here’s a quick breakdown of why we’re such fans of a Roth IRA:
- You can contribute at any age as long as you meet income requirements.
- Your contributions and growth are tax-free.
- You won’t have to pay taxes when you start withdrawals at retirement.
- You’re not required to take distributions at a certain age, unlike the traditional IRA (which requires withdrawals starting at age 73).6
- You can keepcontributing to your Roth IRAif you choose to work past retirement age, as long as your income still falls within the income limits we’ll discuss a little later.
- You can choose beneficiaries to inherit your Roth IRA, and they’ll be able to use the money in the account tax-free too.
2024 Roth IRA Contribution Limits
You knew there had to be a catch! Unfortunately, Uncle Sam says you can’t just put as much money as you want into an IRA. For 2024, the total amount you can contribute to either a Roth IRA or a traditional IRA is $7,000 ($8,000 if you’re 50 or older).7
Market chaos, inflation, your future—work with a pro to navigate this stuff.If you’re consideringrolling over your 401(k)to a Roth IRA, though, we have good news! Rolling over your money doesn’t count toward your contribution limit. Just be sure to check with your financial advisor about how rolling over your retirement fund can affect taxes.
Am I Eligible to Open a Roth IRA?
This one’s easy, folks. If you earn income and it’s less than the Roth income requirements, which we’ll cover right below, then you’re eligible.
But you can’t contribute more than you make. So, if your 19-year-old son or daughter earned $3,000 waiting tables over the summer, they can only contribute up to $3,000 to a Roth IRA.8
Another perk: There are no age restrictions with Roth IRAs. Whether you’re 17 years old or you just turned 92, you can contribute to your account as long as you’re earning an income.
2024 Roth IRA Income Limits
A Roth IRA offers some great tax benefits, but those benefits aren’t available foreveryone. Once your income reaches a certain amount, you’ll either have to contribute a reduced amount or not contribute at all.
Here’s how the 2024 Roth IRA income limits and contribution limits play out:
Filing Status | Roth IRA Income Limits | Roth IRA Contribution Limits |
Single or Head of Household | Less than $146,000 | $7,000 (8,000 if age 50 or older) |
More than $146,000 but less than $161,000 | Contribution is gradually reduced | |
$161,000 or more | No contribution allowed | |
Married, Filing Jointly or Qualifying Widow(er) | Less than $230,000 | $7,000 ($8,000 of age 50 or older) |
More than $230,000 but less than $240,000 | Contribution is gradually reduced | |
$240,000 or more | No contribution allowed9 |
If your income exceeds the Roth IRA eligibility limits, good for you—but bad for your ability to open a Roth IRA. You won’t be able to stash your cash in a Roth, but a traditional IRA might be an option. Tax benefits for traditional IRAs have different eligibility requirements, socheck with an investing proto see if it’s a good choice for you.
If you’reself-employed, here’s another option: Establish a Simplified Employee Pension Plan (SEP) or a solo 401(k). Or if you run a small company with employees,consider aSIMPLE IRAthat’ll allow you and your team members to save for retirement.
Roth IRA vs. Traditional IRA
While both types of IRA help people save for retirement, the main difference between aRoth IRA and a traditional IRAis how they’re taxed. We’ve touched on this already, but let’s recap:
- Roth IRA:Funded with after-tax dollars, which means your investments grow tax-free—and you can use the money in your Roth IRA tax-free when you retire.
- Traditional IRA:Funded with pretax money—so you get a tax break now, but you’ll have to pay taxes on any money you withdraw in retirement, including all the growth on your contributions.
Another major difference is income limits.
- Traditional IRA: No income limits—you can contribute no matter how high your annual income is.
- Roth IRA: For 2024, you can contribute up to the maximum amount if your gross income is less than $146,000 for single and head of household filers, and less than $230,000 for married couples filing jointly.10
And what about withdrawals? This is another way the Roth account comes out on top for most people.
- Roth IRA: You aren’t taxed on withdrawals in retirement, and there are no mandatory withdrawals you have to take at a certain age. You can leave your money in a Roth IRA as long as you want before you start making withdrawals.
- Traditional IRA: You have to make annual withdrawals after you turn 73.11 And on top of that, you’ll be paying taxes on those withdrawals. Yuck!
How Much Can I Put in My Roth IRA Monthly?
We know the 2024 Roth IRA contribution limit is $7,000 for those under age 50, so figuring out how much you can contribute monthly is pretty simple. Just divide $7,000 by 12 months, and you get a monthly contribution of $583.33.
For those 50 or older, that contribution limit increases to $8,000, which comes to 12 monthly contributions of $666.67.
Roth IRA Withdrawal Rules
Okay, folks. We’ve covered the advantages of a Roth IRA, including the fact that you pay taxes on your contributions up front. And when it comes toearlywithdrawal rules, that can be goodandbad news.
Here’s an overview of withdrawal rules for a Roth IRA before we get into the details.
If you are . . . | And you’ve held your Roth IRA for . . . | You can withdraw . . . |
Under age 59 1/2 | Less than 5 years | Contributions (without taxes or penalty) Earnings (subject to taxes and a 10% penalty) |
Under age 59 1/2 | 5 years or longer | Contributions (without taxes or penalty) Earnings (subject to taxes and a 10% penalty) |
Older than 59 1/2 | Less than 5 years | Contributions (without taxes or penalty) Earnings (subject to taxes) |
Older than 59 1/2 | 5 years or longer | Contributions and earnings (without taxes or penalties) 12 |
The Five-Year Rule
If you’re older than age 59 1/2andyour Roth IRA has been open at least five years, you can withdraw money (contributions and growth) from your Roth IRA tax- and penalty-free. Sweet!
But if it’s been fewer than five years since you opened your Roth IRA, youwillbe subject to taxes on any earnings you withdraw.13
Roth IRA Beneficiary Rules
The rules for Roth IRA beneficiaries revolve around two factors: the beneficiary’s relationship to the original owner and the age of the Roth IRA account.
Before the SECURE Act was passed in 2019, any beneficiary, no matter what their relationship was to the original owner, could leave that money in the Roth IRA for as long as they wanted. No required minimum distributions (RMDs) to worry about.
But now only certain qualified beneficiaries can leave inherited funds in a Roth IRA for longer than 10 years after the original owner’s death:
- Spouse of the original owner
- Minor children of the original owner
- Anyone disabled or chronically ill
- Anyone not more than 10 years younger than the original owner (like a younger sister or brother)14
Any beneficiary who doesn’t meet these qualifications has to withdraw all funds within 10 years of the original owner’s death.15So, what if your beneficiary is younger than 59 1/2? Will they be penalized for early withdrawal? No. That’s the good news.
The not-so-good news is, if your beneficiary takes a withdrawal from your Roth IRA and you had held that Roth IRA for less than five years, then the earningswillbe subject to tax.17That’s the five-year rule we discussed earlier coming back into play.
How to Open a Roth IRA
Now that we’ve gone over the nitty-gritty details, let’s get down to the practical stuff.
The best way to open a Roth IRA is with the help of aninvestment professionalwho will meet with you face-to-face. Before you meet with your investment pro, you’ll need to gather some information and fill out the application. Here’s what you’ll need:
- Your driver’s license or other form of photo identification
- Your Social Security number
- Your bank’s routing number and your checking or savings account number
- Your employer’s name and address
As part of the process ofstarting a Roth IRA, you’ll also choose a beneficiary (or beneficiaries) who’ll inherit your account if something happens to you. You’ll need their name, Social Security number and date of birth.
Next, just add money! You can open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month. You can actually do both as long as you don’t go over the contribution limit for that year.
Get Started on a Roth IRA Today!
Opening a Roth IRA is as easy as opening a checking account. The best way to get started is to contact an investment professional who can guide you through the set-up process.
If you don’t have a financial professional, reach out to a SmartVestor Pro in your area. They’re committed to educating and empowering you to make the best decisions possible for your retirement future.
Find your SmartVestor Pro today!
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Frequently Asked Questions
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Is a Roth IRA the same thing as a Roth 401(k)?
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Nope, a Roth IRA and a Roth 401(k) are not the same. But your contributions to both accounts are taxed the same way. Adding the word Roth to the name of either savings plan means the money you contribute will be taxed up front, grows tax-free, and can be withdrawn tax-free after age 59 1/2.
But there are a couple big differences between the two plans that we have to talk about. First, you can contribute a lot more to a Roth 401(k) each year than an IRA (about three times more for most people).
Second, Roth 401(k) plans are sponsored by employers. Most companies offer an employer match on your Roth 401(k)—which is great news for you! But keep in mind, the match is not tax-favored. That means the growth from your employer’s match will be taxed when you withdraw your funds in retirement.
If your job offers you a Roth 401(k) with a match, take it! You can contribute toboth a Roth IRA and a Roth 401(k) at the same time.
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How much money do you need to start a Roth IRA?
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The great thing about Roth IRAs is that you don’t need to invest a ton of money to open an account. In fact, the IRS doesn’t require a minimum amount to open a Roth IRA. Most mutual fund companies require an account minimum to open one, but you can start a Roth IRA with as little as $50 in most cases.
That means there’s no need to put off investing, people! Once you’re out of debt with a fully funded emergency fund, you can dive right in and start investing 15% of your income for retirement.
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What should my Roth IRA be invested in?
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You can invest in almost anything through your Roth IRA, but we recommend mutual funds because they have the highest potential for helping you build wealth over time—especially with a Roth IRA’s tax benefits.
If you feel lost when it comes to picking mutual funds, an investment professional can help you find good growth stock mutual funds with a history of strong returns.
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Can I set up a Roth IRA for my spouse who doesn't work?
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Yes, your spouse who doesn’t work can open a Roth IRA. If you file a joint income tax return and at least one of you has taxable income, you can both contribute to your own separate Roth IRAs. But the IRS income-eligibility limits still apply.
Let’s say 40-year-old John makes $150,000 and his wife, Kate, stays home with their kids. John can put up to $6,500 in his IRA. And Kate can open a spousal IRA in her name and contribute the maximum amount of $6,500 as well.
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Can you lose money in a Roth IRA?
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The short answer is yes. There’s always an element of risk when you invest, but you can minimize your risk by spreading out your investments evenly across four different types of mutual funds: growth and income, growth, aggressive growth, and international. That way, you’ll balance and diversify your portfolio between higher-risk investments and more steady and predictable ones.
And listen, if the market has a bad day, don’t panic and take all your money out of the investments in your Roth IRA. That’s the worst thing you can do because all you’re doing is locking in your losses. And if you actually withdraw all the money from your Roth IRA, you’ll get hit with a slew of taxes and penalties if you’re under age 59 1/2.
Don’t do it!
Investing in the stock market is like riding a roller coaster—the only people who get hurt are the ones who jump off. The investors who keep their cool and give their money time to grow are the ones who get to the end of the ride safe and sound. When in doubt, reach out to an investment pro for guidance!
This article provides generalguidelines about investingtopics. Your situation may beunique. If you havequestions, connect with aSmartVestorPro.RamseySolutions is a paid, non-clientpromoter ofparticipating Pros.
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About the author
Ramsey
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
