A Roth IRA is a retirement savings account where you contribute after-tax money and withdrawals in retirement are tax-free

A Roth IRA is a retirement account that works differently from a traditional IRA or 401(k). You put in money that you've already paid taxes on, and when you withdraw that money in retirement—along with any growth it earned—you owe no federal income tax on it. The account itself doesn't earn money; it's a container that holds investments like stocks, bonds, or mutual funds that earn money inside it.

You open a Roth IRA through a financial institution: a bank, a brokerage firm, or an investment company. The institution holds the account and the investments in it. You decide what to invest in, and you control when and how much you contribute each year, within legal limits.

The main catch is income limits. If your income is above a certain threshold, you cannot contribute to a Roth IRA directly. That threshold changes each year and depends on your filing status. For 2024, if you file as single, the limit phases out between $146,000 and $161,000 of modified adjusted gross income. If you're married filing jointly, it phases out between $230,000 and $240,000. If your income exceeds these ranges, you may still have other options, which are covered below.

Key Takeaways

  • You open a Roth IRA at a bank, brokerage, or investment company by providing your name, address, Social Security number, and employment information.
  • For 2024, you can contribute up to $7,000 per year if you're under 50, or $8,000 if you're 50 or older, but only if your income is below the annual limit for your filing status.
  • You can withdraw the money you contributed (not the earnings) at any time without penalty, but earnings withdrawn before age 59½ usually trigger taxes and a 10% penalty.
  • If your income exceeds the Roth IRA limit, a backdoor Roth conversion may allow you to contribute indirectly, though this involves specific steps and tax considerations.
  • The account itself is just a container; you choose what investments go inside it, and different institutions offer different investment options.

Where to open a Roth IRA and what information you'll need

You can open a Roth IRA at most banks, but banks typically offer only basic investments like savings accounts or CDs, which earn very little. Most people open a Roth IRA at a brokerage firm or investment company because they offer a wider range of investments. Common choices include Fidelity, Vanguard, Charles Schwab, E-Trade, and Merrill Edge, but many smaller brokerages and robo-advisors also offer Roth IRAs.

To open an account, you'll need to provide your full legal name, date of birth, Social Security number, address, and employment information. The institution will ask whether you're opening the account for yourself or as a custodian for a minor (a custodial Roth IRA). You'll also choose how you want to fund the account: by transferring money from a bank account, by mailing a check, or sometimes by wire transfer. Most institutions let you start the process online and complete it in 10 to 15 minutes.

The institution will verify your identity and may ask follow-up questions about your employment or income. Once approved—usually within one business day—your account is open and you can begin investing. You don't have to fund it when ready; you can open it now and contribute later in the year.

How much you can contribute each year and when the important date is

For 2024, you can contribute up to $7,000 per year to a Roth IRA if you're under age 50. If you're 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution, for a total of $8,000. These limits explore to all your IRAs combined—if you have both a Roth IRA and a traditional IRA, your total contributions to both cannot exceed the annual limit.

The contribution limit changes most years. The IRS adjusts it for inflation in $500 increments. For 2025, the limit is $7,000 for those under 50 and $8,000 for those 50 and older, but check the IRS website or your institution's website for the current year's limit.

You can contribute to a Roth IRA for a given tax year until the tax filing important date for that year, which is usually April 15 of the following year. If you contribute after that date, the institution will treat it as a contribution for the current year, not the previous one. You can contribute as much as you want throughout the year—$500 one month, $2,000 the next—as long as your total doesn't exceed the annual limit.

What happens if your income is too high to contribute directly

If your income exceeds the Roth IRA limit for your filing status, you cannot contribute directly. However, a strategy called a backdoor Roth conversion may allow you to contribute indirectly. The process works like this: you contribute money to a traditional IRA (which has no income limit), then when ready convert that money to your Roth IRA. The conversion itself is taxable in the year you do it, but the money ends up in the Roth where future growth is tax-free.

A backdoor Roth conversion involves several steps and has tax implications that depend on whether you already have money in traditional IRAs. If you have existing traditional IRA balances, the conversion may trigger taxes on a portion of the converted amount. This is called the "pro-rata rule." Because of this complexity, many people consult a tax professional before doing a backdoor Roth conversion for the first time.

Another option, if your employer offers one, is a Solo 401(k) or SEP IRA if you're self-employed. These have higher contribution limits and no income restrictions. A financial advisor or tax professional can help you determine which option makes sense for your situation.

How to choose investments inside your Roth IRA

Once your account is open and funded, you need to decide what to invest in. The institution will show you a menu of available investments—usually stocks, bonds, mutual funds, exchange-traded funds (ETFs), or target-date funds. If you don't choose an investment, some institutions will place your money in a money market fund or sweep account, which earns very little.

Target-date funds are a common choice for people who don't want to pick individual investments. These funds automatically adjust their mix of stocks and bonds based on your expected retirement year. A target-date 2050 fund, for example, holds mostly stocks now and gradually shifts toward bonds as 2050 approaches. The fund does the rebalancing for you.

If you prefer to choose individual investments, you can build a straightforward portfolio of a few low-cost index funds or ETFs. Many people use a mix like 70% stock index funds and 30% bond index funds, adjusted based on their age and risk tolerance. The key is to choose investments you understand and that match your timeline—money you won't need for 20 years can weather more volatility than money you'll need in 5 years.

Rules for withdrawing money from your Roth IRA

One major advantage of a Roth IRA is flexibility with withdrawals. You can withdraw the money you contributed (your "basis") at any time, for any reason, without taxes or penalties. If you contributed $5,000 and your account grew to $6,000, you can withdraw the $5,000 anytime penalty-free.

Withdrawals of earnings—the $1,000 growth in the example above—are different. If you're under age 59½ and you've had the account for less than five years, withdrawals of earnings trigger federal income tax plus a 10% early withdrawal penalty. After age 59½, you can withdraw earnings tax-free and penalty-free. There are a few exceptions to the early withdrawal penalty, such as withdrawals for a first-time home purchase (up to $10,000 lifetime) or for certain medical expenses, but these exceptions don't explore to all situations.

Unlike a traditional IRA or 401(k), a Roth IRA has no required minimum distributions. You never have to withdraw money, even after age 72. This makes a Roth IRA useful for leaving money to heirs, since they inherit the account and its tax-free growth potential.

Moving money between accounts and converting from a traditional IRA

If you already have a traditional IRA or 401(k) at another institution, you can move that money to your new Roth IRA through a conversion. The process is straightforward: you contact the institution holding the traditional account and request a direct transfer to your Roth IRA. The money moves directly between institutions, and you don't touch it.

A conversion is a taxable event. If you convert $10,000 from a traditional IRA to a Roth IRA, you owe federal income tax on that $10,000 in the year of the conversion. The tax is based on your tax bracket. This is why many people convert smaller amounts over several years rather than converting everything at once—it spreads the tax bill across multiple years.

You can also roll over a 401(k) from a previous employer into a Roth IRA, though this also triggers taxes on the amount converted. Some employers allow you to do a "Roth conversion" directly within the 401(k) plan before rolling it over, which can simplify the process. Check with your former employer's plan administrator about your options.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can have both, but your total contributions to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a Roth IRA, you can contribute only $3,000 to a traditional IRA that year (assuming the $7,000 limit for 2024). Contributions to each account are tracked separately, but they count toward the same annual ceiling.

What if I withdraw money from my Roth IRA and then want to put it back?

You can recontribute the money, but it counts as a new contribution toward your annual limit. If you withdrew $2,000 and recontribute it, that $2,000 uses up $2,000 of your annual contribution room. You cannot "undo" a withdrawal to avoid using up contribution space. If you made a mistake, some institutions allow a "recharacterization" within a certain timeframe, but rules around this have changed, so check with your institution.

Do I have to report my Roth IRA on my taxes?

You don't report contributions to a Roth IRA on your tax return—you've already paid taxes on that money. If you do a conversion from a traditional IRA or 401(k), you'll report the conversion amount on Form 8606. Withdrawals of earnings may require reporting depending on your age and how long you've had the account. Your institution will send you a Form 5498 each year showing your contributions.

Can I open a Roth IRA for my child?

Yes, you can open a custodial Roth IRA for a minor if they have earned income from a job or self-employment. The child's earned income is the limit on how much can be contributed—if your 14-year-old earned $3,000 from a summer job, you can contribute up to $3,000 to their Roth IRA. You control the account as custodian until they reach the age of majority in your state, usually 18 or 21.

What happens to my Roth IRA if I die?

Your Roth IRA passes to your beneficiary (or beneficiaries) as part of your estate. The beneficiary inherits the account and can continue to let it grow tax-free. They must take distributions based on their relationship to you and IRS rules, but the tax-free growth continues. This makes a Roth IRA a powerful tool for leaving money to heirs compared to a traditional IRA or taxable account.