Roth IRAs provide not only several tax benefits but also flexibility when it comes to withdrawing your money. Contributions you make to a Roth IRA are made with money on which you’ve already paid taxes. And since the IRS has already taken its share, individuals can withdraw contributions at any time, tax- and penalty-free.
What’s more, there are no required minimum distributions (RMDs) during your lifetime. Meaning you aren’t required to start withdrawing from your Roth IRA when you turn the age of 72, as is the case with a traditional IRA. But unlike a traditional IRA, you cannot deduct Roth IRA contributions.
A Roth IRA is a type of investment account that lets you benefit from various tax advantages while you save for retirement. A Roth IRA operates much like its traditional IRA counterpart: same total contribution limits, same early-withdrawal penalties and same flexibility when it comes to the types of allowable investments. But with a Roth IRA:
IRAs may be covered by either the Securities Investor Protection Corporation (SIPC) and the Federal Deposit Insurance Corporation (FDIC), or both. Protection is against loss in the event the bank or brokerage fails, not loss from the performance of the investment. Insurance eligibility depends on your assets and the standing of the bank or brokerage.
IRAs that contain bank deposits such as CDs, savings accounts or money market accounts and are held at an FDIC-insured bank or institution are generally insured by the FDIC up to $250,000 per account holder. Investment products such as stocks and mutual funds in an IRA account are not FDIC-insured. Still, securities and cash held at a SIPC-insured bank or brokerage are covered by the SIPC up to $500,000.
In 2024, the contribution limit for all your IRAs — that’s both traditional and Roth IRAs — is $7,000 (or $8,000 if you’re age 50 or older). If your modified adjusted gross income (MAGI) for the year is less than $146,000, or $230,000 if married filing jointly, you can contribute up to the full $7,000. Once your MAGI exceeds that amount, your maximum contribution begins to diminish until you can’t contribute at all to a Roth IRA (unless you go the backdoor Roth IRA route).
While income limits apply, Roth IRAs have no age limits. Anyone with earned income, even minors, can contribute to a Roth IRA.
You have until the next tax return filing deadline to contribute to a Roth IRA for the prior year. For example, you can make 2023 Roth IRA contributions until April 15, 2024.
Married filing jointly or qualifying widow(er)
| Modified AGI | Contribution |
|---|---|
| < $230,000 | up to the limit |
| ≥ $230,000 but < $240,000 | a reduced amount |
| ≥ $240,000 | Zero |
Married filing separately (lived with your spouse at any time during the year)
| Modified AGI | Contribution |
|---|---|
| < $10,000 | a reduced amount |
| ≥ $10,000 | zero |
Single, head of household or married filing separately (did not live with your spouse at any time during the year)
| Modified AGI | Contribution |
|---|---|
| < $146,000 | up to the limit |
| ≥ $146,000 but < $161,000 | a reduced amount |
| ≥ $161,000 | zero |
Roth IRA contributions are made using after-tax dollars. As such, the money you save isn’t tax-deductible like it is with a traditional IRA. But since contributions are made using money on which you’ve already paid taxes, you can withdraw your contributions at any time without taxes or penalties. Meanwhile, all the earnings on your investments grow free of tax.
If you’re at least 59 and a half years old at the time you withdraw earnings from a Roth IRA and your account has been open for at least five years (more on this later), you won’t owe federal income tax on your withdrawals.
Withdrawing earnings before the age of 59 and a half will trigger both regular income tax and a 10% early withdrawal penalty. That said, there are a number of exceptions that would waive the additional 10% penalty. The following list isn’t exhaustive, but some exceptions include:
Federal law permits most types of investments in an IRA, except life insurance or collectibles. Allowable investments include:
While many assets are allowed in a Roth IRA, available investments ultimately depend on what the IRA custodian offers. Most major banks and brokers impose restrictions on alternative investments because of regulatory requirements and added red tape and instead stick with offering only traditional assets, such as stocks, bonds and ETFs. To diversify your IRA with alternative investments like crypto and real estate, find a custodian that offers self-directed IRAs.
Roth IRAs are flexible retirement accounts, but they have unique rules you need to be aware of.
You can only contribute to a Roth IRA if you meet certain income criteria. The IRS determines your eligibility to contribute to a Roth IRA based on your tax filing status and your MAGI. Your MAGI is your adjusted gross income plus certain deductions, like student loan interest or qualified tuition expenses.
For example, if you are single, head of household or married filing separately, you cannot contribute to a Roth IRA if your 2024 MAGI is above $161,000. Married couples filing jointly cannot contribute to a Roth IRA with a 2024 MAGI over $240,000. It’s important to remember that the IRS considers your MAGI and not your gross income. So even if your gross income is above the income limit, you may still qualify to make Roth IRA contributions if any applicable deductions lower your MAGI below the threshold.
These income rules are meant to enforce fairness and prevent high-paid workers who can afford to save large amounts of their salary from benefitting more than the average worker.
While the withdrawal rules for Roth IRAs are more flexible than traditional IRAs, there’s one Roth-specific withdrawal rule to know about.
The 5-taxable-year period of participation — or 5-year rule — stipulates that you cannot withdraw earnings tax-free until you’ve participated in your Roth IRA for at least five years. The clock starts on the first day of the taxable year in which you first made a contribution. For example, if you first contribute to a Roth IRA on September 3, 2024, the clock starts January 1, 2024 — the first day of the taxable year.
The 5-year rule applies regardless of age. So if you first contribute to a Roth IRA at age 58, you must wait until age 63 to begin taking qualified distributions from your account. For this reason, it could be a good idea to contribute any amount to your Roth IRA as soon as possible to start the clock.
The IRS views your distributions as either qualified or nonqualified. It considers distributions to be qualified if you’re the age of 59 and a half or older and your Roth IRA is at least five years old. A nonqualified distribution is any distribution that doesn’t meet these requirements, and they’re typically subject to tax and penalties.
Here’s a breakdown of how the IRS treats distributions with the 5-year rule and 59-and-a-half age threshold in mind.
If you meet the 5-year rule:
If you don’t meet the 5-year rule:
The main difference between a Roth and a traditional IRA is tax treatment. Only contributions made to traditional IRAs are tax-deductible, while qualified withdrawals from a Roth IRA are tax-free.
IRAs at a glance
| Roth | Traditional | SEP (Simplified Employee Pension) | SIMPLE (Savings Incentive Match Plan for Employees) | Self-directed | |
|---|---|---|---|---|---|
| Who it’s for | You’re under the income limit threshold You think you’ll be in a higher income tax bracket in retirement | You want to deduct your contribution You think you’ll be in a lower income tax bracket in retirement | Business owners with or without employees who want tax-deductible contributions | Small business owners not currently sponsoring a retirement plan | You want to invest in both traditional and alternative assets |
| 2024 max contribution | $7,000 ($8,000 if you’re age 50 or older) | $7,000 ($8,000 if you’re age 50 or older) | Business owners can contribute up to the lesser of $69,000 or 25% of an employee’s salary | Employees can contribute up to $16,000 from their salary Employers are required to match each employee’s elective-deferral contributions, dollar-for-dollar, up to 3% of the employee’s compensation | Contribution limits depend on whether the IRA functions as a traditional, Roth or SEP IRA |
| Are contributions tax-deductible? | No | Yes, but your eligibility and the amount you can deduct depends on your tax filing status, MAGI and whether you have a workplace retirement plan | Yes, employers can deduct the lesser of their contributions or 25% of the employee’s compensation | Not for employees Business owners can deduct all contributions made to an employee’s SIMPLE IRA Sole proprietors can deduct their own salary reduction contributions and their own matching or nonelective contributions | The same tax deduction rules for standard traditional, Roth, SEP and SIMPLE IRAs apply |
| Response | % of Americans |
|---|---|
| I do not have this, but plan on getting it in the next 6 months | 13% |
| I do not have this nor plan on getting it | 56% |
| I currently have this | 31% |
While a little less than a third (31%) of American adults say that they’re currently invested in an IRA, an additional 13% do plan on opening one in the next six months.
A Roth IRA is an investment vehicle that offers both valuable tax benefits and flexibility when it comes to withdrawing your money. Qualified distributions are tax-free, making Roth IRAs particularly beneficial if you expect to retire at a higher tax bracket or you’re many years away from retirement and expect a lot of growth on your investments.
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