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Roth individual retirement accounts (IRAs) are tax-advantage savings accounts that give you the opportunity to invest for your future. These accounts are funded with after-tax dollars and withdrawals and tax-free. While there is no age limit for opening a Roth IRA, there are income limits. Learn more about how Roth IRAs work to determine if investing with one makes sense for you.
How Roth IRAs Work
With a Roth IRA, your contributions are made with after-tax dollars and your withdrawals are tax-free, allowing your money to grow tax-free in the account over the years. Because of this, Roth IRAs work especially well for people who will be in a higher tax bracket when they withdraw the money than they are when they contribute. However, that’s hard to predict, and financial advisors tend to say that a Roth IRA can be a good way to diversify a retirement portfolio either way.
Once you open your account, you have several investment options to buy in your Roth IRA. You can opt for investment assets like stocks and bonds, as well as savings vehicles like a certificate of deposit.
| Fast fact: |
| In mid-2023, households owning Roth or traditional IRAs for less than 10 years had median holdings of $25,000, while households owning Roth or traditional IRAs for 20 years or more had median holdings of $280,000. |
Source: Investment Company Institute
To deter Roth IRA owners from using savings for anything but retirement costs, there’s a penalty if you withdraw funds before you turn age 59 1⁄2 and before the account is five years old. While you can withdraw contributions at any time without facing taxes and penalties, if you withdraw funds early, you may face taxes and a 10% early distribution penalty on earnings.
There are exceptions to this rule, outlined by the IRS like if you use up to $10,000 of the funds to pay for your first home. If you’re over age 59 1⁄2 but you’ve had the Roth IRA for less than five years, you’ll have to pay taxes on earnings, but you won’t face penalties. If you’re unsure about what taxes and/or penalties you’ll face, consider speaking to a financial advisor or licensed tax expert.
Roth IRA Income Limits
There’s a limit to how much you can contribute annually to IRAs, including Roth IRAs. For 2024, those under age 50 can contribute up to $7,000. People over age 50 can contribute up to $8,000. This limit is the same even if you have multiple types of IRAs— so if you have a traditional IRA and a Roth IRA you can only contribute $7,000 total if you’re not yet age 50.
However, Roth IRAs require your income to be below a specific threshold to contribute the full amount.
In 2024, if your modified adjusted gross income (MAGI) is less than $146,000 and you’re a single filer, you can contribute the full amount to your Roth IRA. If your MAGI is more than $146,000, but less than $161,000, you can only contribute a reduced amount, and if your income is higher than $161,000, you’re not eligible to contribute to a Roth IRA at all, according to the IRS.
There are different MAGI limits, depending on your tax filing status.
| Filing status | 2024 Income limit | Contribution limit |
| Single filer | Less than $146,000 or less | $7,000 (or $8,000 if you’re 50 or older) |
| More than $146,000, but less than $161,000 | Reduced contribution | |
| $161,000 or more | No contribution | |
| Married couples filing jointly | Less than $230,000 | $7,000 (or $8,000 if you’re 50 or older) |
| More than $230,000, but less than $240,000 | Reduced contribution | |
| $240,000 or more | No contribution | |
| Married filing separately | Less than $10,000 | Reduced contribution |
| $10,000 or more | No contribution |
Source: IRS
Other Roth IRA Rules
There are three other important Roth IRA rules to be aware of: RMD rules, the savers credit and penalty-free rollover rules.
Traditional IRAs require you to withdraw required minimum distributions (RMDs) once you hit age 73, but Roth IRAs don’t. However, there are RMDs for Roth IRAs that are inherited.
Unlike with traditional IRAs, you can’t deduct contributions to Roth IRAs. But you may qualify for the retirement savings contribution credit (also known as the saver’s credit). Eligible taxpayers can get a savings credit worth up to 50%, 20% or 10% of the maximum amount of their contribution, depending on their income. If your adjusted gross income (AGI) is below a specific limit, your tax bill can be reduced by up to $1,000 (or $2,000 if you’re married and filing jointly).
Meanwhile, the Secure 2.0 Act introduced penalty-free rollovers from 529 college savings plans to Roth IRAs, which may come in handy for parents with leftover funds in their kids’ 529 plans. However, there are some limitations, including that the lifetime rollover limit is $35,000 and the 529 account must be open for at least 15 years.
Who Is Best Suited for a Roth IRA?
Roth IRAs can make sense for many retirement savers as they allow you to diversify your retirement portfolio and take advantage of tax-free withdrawals in retirement. These accounts especially make sense if you expect to be in a higher tax bracket in the future, but that’s typically hard to predict.
Because RMDs aren’t required for Roth IRAs they allow your funds to continue growing for a longer period of time than a traditional IRA might — and could especially make sense if you want to leave retirement savings behind for your beneficiaries.
Consider consulting with a financial advisor before opening a Roth IRA to help you determine if it best fits your needs.
Sources:
IRS. (2024, February 28). Retirement plan and IRA Required Minimum Distributions FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
IRS. (2024, February 12). Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs. Retrieved from https://www.irs.gov/taxtopics/tc557
Investment Company Institute. (2024, February). The Role of IRAs in US Households’ Saving for
Retirement, 2023. Retrieved from https://www.ici.org/system/files/2024-02/per30-01.pdf
IRS. (2024, January 8). 401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000. Retrieved from https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000
IRS. (2023, August 29). Traditional and Roth IRAs. Retrieved from https://www.irs.gov/retirement-plans/traditional-and-roth-iras
Senate Committee on Finance. (2022). SECURE 2.0 Act of 2022. Retrieved from https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
