Retirement Accounts

What is a Roth IRA?

Roth IRA accounts are popular because they help to ease the tax burden in retirement.

Stephanie Faris

Stephanie Faris

Published February 28th, 2024

Updated February 28th, 2024

Table of Contents

Key Takeaways

IRA stands for “individual retirement account.”

You can get an IRA from a variety of online and local brokers, as well as through robo-advisor apps.

With a Roth IRA, you put money in now, after already paying taxes on it, in exchange for tax-free distributions at retirement.

Traditionally, retirement savings accounts have been offered as a perk of employment. But you don’t have to rely on an employer to set money aside for later. An individual retirement account (IRA) can help you invest in an account designed specifically for funding your retirement.

There are two types of IRAs: Traditional and Roth. Like a 401(k), a Traditional IRA lets you put money in before taxes are taken out on it. On the other hand is the Roth IRA. With a Roth IRA, you put the money in after you’ve paid taxes on it.

What is a Roth IRA?

A Roth IRA is a retirement savings account that allows your money to grow tax-free, with withdrawals in retirement also being tax-free, funded with after-tax dollars.

Often when someone asks what is a Roth IRA, it’s in comparison to a Traditional 401(k) or a Traditional IRA. While it’s great to have retirement savings taken out of your check before your income is taxed, there’s a price to pay. When you retire, you’ll owe taxes on the money.

Roth IRA accounts are popular because they help to ease the tax burden in retirement. They lock in the certainty of taxes that you will pay on this account because you’re paying those taxes now. You may be living on a limited income at retirement time, so the break in income taxes will be a relief.

How to Open a Roth IRA

A Roth Individual Retirement Account (Roth IRA) is a powerful tool for retirement savings, offering tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, which means you pay taxes on the money before it goes into your account.

Here's how to open a Roth IRA and start building a more secure financial future.

Step 1: Determine Your Eligibility Before you open a Roth IRA, ensure you're eligible. Your ability to contribute to a Roth IRA depends on your income level. The IRS sets income limits that are updated annually, so check the current limits to see if you qualify. Generally, if you earn too much, you may be partially or fully phased out from contributing.

Step 2: Choose Where to Open Your Roth IRA Roth IRAs can be opened with a variety of financial institutions, including banks, brokerage firms, and robo-advisors. When selecting a provider, consider factors such as:

  • Fees: Look for low fees, including account fees, trading fees, and expense ratios on mutual funds or ETFs.
  • Investment Options: Ensure a wide range of investment choices that align with your risk tolerance and investment goals.
  • Ease of Use: Consider the platform's usability, customer service, and the availability of educational resources.
  • Minimum Investment Requirements: Some providers require a minimum amount to open an account, while others do not.

Step 3: Gather Required Documents Be prepared to provide personal information and documentation, including:

  • Social Security Number (SSN)
  • Driver's license or other government-issued ID
  • Employment information
  • Bank account information for funding your account

Step 4: Fill Out the Application You can usually complete the application process online within a few minutes. You'll need to provide the information gathered in the previous step and make decisions about your account, such as naming beneficiaries.

Step 5: Fund Your Roth IRA Once your account is open, you need to fund it. You can do this by transferring money from your bank account, rolling over funds from another retirement account, or setting up a direct deposit. Decide how much you want to contribute and remember that there are annual contribution limits set by the IRS.

Step 6: Choose Your Investments With your Roth IRA funded, it's time to choose how to invest your money. Your options might include stocks, bonds, mutual funds, ETFs, and more. If you're unsure where to start, consider speaking with a financial advisor or choosing a target-date fund, which automatically adjusts your asset allocation as you approach retirement.

Step 7: Set Up Regular Contributions Maximize your retirement savings by setting up regular contributions to your Roth IRA. Even small, consistent contributions can grow significantly over time thanks to compound interest. Try to contribute as much as you can up to the annual limit.

Inflation? Recession? No worries.

Download our new guide to help safeguard your retirement.
Recession Proof Your Retirement eBook

Funding Your Roth IRA

Before you can start managing your Roth IRA, you’ll need to first get the money into the account. How an IRA works depends largely on the broker type you’ve chosen. But whether you’ve selected an online broker, a robo-advisor app, or a local brokerage, there should be a setup in place that makes funding your account easy.

In addition to answering your questions about what is a Roth IRA, a broker should be able to tell you how the process works. Usually, you’ll be able to provide your bank’s routing number and your own account number and have the funds electronically transferred.

Questions about your Roth IRA? We're here to help.

Schedule your FREE Retirable consultation today.

Are Roth IRAs Insured?

The Federal Deposit Insurance Corporation (FDIC) insures accounts at participating banks for up to $250,000 per depositor per account. This protection extends to IRAs and not 401(k)s, as long as the broker or bank you’ve chosen is FDIC-insured. Look for this branding either on the broker’s website or on a sticker in the window at a brick-and-mortar location.

But with any bank account, it’s important to pay close attention to that $250,000 limit. Your coverage is limited to $250,000 per depositor per location, so if your Roth account is nearing that limit, it might be time to diversify those funds across account types or financial institutions.

What Can You Contribute to a Roth IRA?

While a Roth IRA provides tax-free withdrawals at retirement, there are strict limits on contributions. This starts with what you can contribute. You can only contribute earned income to a Roth IRA. This includes wages, tips, commissions, self-employment income, and non-taxable combat pay.

The amount of your Roth contribution is also limited each year. For 2021, you can only contribute up to $6,000 to your Roth IRA, or $7,000 if you’re age 50 or over.

Who's Eligible for a Roth IRA?

Not everyone will be able to take advantage of the Roth IRA tax-free distributions at retirement. The IRS sets income limits for contributors. If you make above that amount in a tax year, you won’t be able to put money into your Roth IRA that year.

Like the Roth IRA contribution limit, the income limit adjusts from year to year. Currently, if you file separately and make more than $140,000 a year, you can’t contribute to a Roth IRA. If you’re married filing jointly, the income limit is $208,000 in 2021.

The 5-Year Rule

In addition to determining what’s a Roth IRA, you’ll also need to learn the rules specific to them. Since you put your money in with the understanding you won’t pay taxes on withdrawals in retirement, there’s a holding period requirement. The IRS won’t let you take all the money out, tax-free, for five years.

But it’s important to note that not all the funds will be taxed. You can withdraw the amount you contributed tax-free. If you take any of the money that is investment growth within the account, though, you’ll face penalties. In addition to the 5-year rule, you also can’t take the funds out without penalty until you’re aged 59½ unless you have a disability.

Final Thoughts

If you want to know whether a Roth IRA makes sense for you, it’s important to understand the tax benefits and underlying rules for the account. If your employer offers a 401(k), you may want to weigh the tax-deferred features and any available employer matching of contributions against paying taxes on your Roth IRA contributions now for tax-free distributions later. We recommend working with a Certified Financial Planner® to best evaluate your individual circumstances and find the best retirement savings options for you.

Frequently Asked Questions

What is a Roth IRA?

A Roth IRA is a type of individual retirement account where contributions are made with after-tax dollars, allowing for tax-free withdrawals in retirement. This can offer a significant tax advantage, especially for those who expect to be in a higher tax bracket in the future.

How do you open and fund a Roth IRA?

You can open a Roth IRA through various platforms, including local and online brokers, as well as robo-advisors. Funding the account typically involves transferring money electronically from your bank, using your bank’s routing number and your account number.

What are the eligibility requirements and contribution limits for a Roth IRA?

Eligibility to contribute to a Roth IRA is subject to income limits set by the IRS, which may change annually. For 2024, the contribution limit is $7,000 for those under 50 and $8,000 if you're age 50 or older. Contributions can only be made with earned income, which includes wages, salaries, commissions, and self-employment income.

Need help making sense of it all?

We're here to help you navigate your retirement journey.
Income and expenses charts

Share this advice


Stephanie Faris
Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

Retirement Accounts

Understanding 401(k)s


401(k) Rules


Cashing Out your 401(k)


Understanding Roth 401(k)s


Roth IRA Basics

Ad image

Recession-Proof Your Retirement

Download our guide to help safeguard your retirement from economic shifts.


Retirement Accounts

Understanding 401(k)s


401(k) Rules


Cashing Out your 401(k)


Understanding Roth 401(k)s


Roth IRA Basics


Share this advice


Stephanie Faris
Stephanie Faris

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a writer for a credit card processing service and has written about finance for numerous marketing firms and entrepreneurs. Her work has appeared on Money Under 30, The Motley Fool, MoneyGeek, E-commerce Insiders, and GoBankingRates.

Will Your Savings Be Enough?

See if you will have enough monthly income to last through retirement.

personal-plan

Will Your Savings Be Enough?

See if you will have enough monthly income to last through retirement.

personal-plan

Legal

Retirable, Inc. ('Retirable') is an SEC registered investment advisor. By using this website, you accept our Terms and Conditions and Privacy Policy. Retirable provides holistic retirement planning services, which are available only to residents of the United States. You must be at least 18 years of age to become a Retirable Premium user. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities.

Investing involves risk and past performance is not indicative of future results. Increased spending increases the risk of depleting your savings and performance is not guaranteed. It is very important to do your own analysis before making any decisions based on your own personal circumstances.

For more information, see our Form ADV Part II and other disclosures.

Retirable is a financial technology company, not a bank. Banking services provided by Blue Ridge Bank N.A., Member FDIC. FDIC insurance is available for funds on deposit up to $250,000 through Blue Ridge Bank N.A., Member FDIC. The Retirable Visa® Debit Card is issued by Blue Ridge Bank N.A. pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted.

* Annual Percentage Yield (APY) of 5.12% is effective as of Aug 1, 2023. This is a variable rate and may change after the account is opened. Fees could affect earnings on the account.

** Refer to the fee schedule in your Consumer Deposit Account Agreement

© 2024 Retirable Inc. All rights reserved.

We're accredited and certified by

Legal

Retirable, Inc. ('Retirable') is an SEC registered investment advisor. By using this website, you accept our Terms and Conditions and Privacy Policy. Retirable provides holistic retirement planning services, which are available only to residents of the United States. You must be at least 18 years of age to become a Retirable Premium user. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities.

Investing involves risk and past performance is not indicative of future results. Increased spending increases the risk of depleting your savings and performance is not guaranteed. It is very important to do your own analysis before making any decisions based on your own personal circumstances.

For more information, see our Form ADV Part II and other disclosures.

Retirable is a financial technology company, not a bank. Banking services provided by Blue Ridge Bank N.A., Member FDIC. FDIC insurance is available for funds on deposit up to $250,000 through Blue Ridge Bank N.A., Member FDIC. The Retirable Visa® Debit Card is issued by Blue Ridge Bank N.A. pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit cards are accepted.

* Annual Percentage Yield (APY) of 5.12% is effective as of Aug 1, 2023. This is a variable rate and may change after the account is opened. Fees could affect earnings on the account.

** Refer to the fee schedule in your Consumer Deposit Account Agreement

© 2024 Retirable Inc. All rights reserved.

We're accredited and certified by