Roth Individual Retirement Accounts (Roth IRAs)
Your Guide to Roth IRAs
Frequently Asked Questions
How to open a Roth IRA?
If you’re eligible and decided to open a Roth IRA, you’d need to pick where you want to open that account. Many brokerages and other financial institutions offer Roth IRAs. Once you’ve decided where to open an account, you would need to submit personal information and documentation. After that, you’d need to fund your account and choose your investments.
When can you withdraw from a Roth IRA?
Technically, you can withdraw money from your Roth IRA at any time. However, in doing so, you may be liable to pay additional taxes or penalties. You may have to pay a 10% early withdrawal penalty if you pull your money out before the age of 59 1/2 years of age or within five years of contributing to your account. The IRS also lists some exemptions to this penalty.
How much can you put in a Roth IRA?
The IRS releases annual contribution limits for IRAs. For 2022, you can contribute $6,000 ($7,000 if you’re age 50 or older) in total to all your IRAs, traditional and Roth combined. The IRS also sets income limits for Roth IRA contributions based on your modified adjusted gross income (MAGI). For 2022, those with MAGI less than $144,000 for single filers (or married filing separately) and $214,000 for those married filing jointly, cannot contribute to Roth IRAs. There are also Roth IRA phase out limits that allow you to contribute partially towards the $6,000 annual contribution based on your MAGI.
Where to open a Roth IRA?
You can open a Roth IRA at a brokerage, a bank, a credit union, a life insurance company or a mutual fund provider. If you’re looking to invest in ‘alternative assets’ through your Roth IRA, you may want to consider a self-directed Roth IRA provider. Consider account minimums, customer service and fees before you make a decision.
What is the difference between a traditional IRA and a Roth IRA?
There are a few major differences between traditional IRAs and Roth IRAs. Traditional IRAs are a pre-tax investment, and so qualified distributions are taxable. Roth IRAs are post-tax investments, and so qualified distributions are tax free. Traditional IRAs have required minimum distributions at age 72 years of age, while Roth IRAs have now. Roth IRAs, unlike traditional IRAs, also have income limits on who can contribute to the account and no required minimum distributions.
Who can contribute to a Roth IRA?
Anyone with earned income can contribute to a Roth IRA. For minors with earned income, an adult can open and operate a custodial Roth IRA. However, Roth IRA contributions also have income limits. The IRS releases modified adjusted gross income (MAGI) limits for Roth contributions every year. Your MAGI will determine if you’re able to contribute fully, partially or not at all towards the annual IRA contribution limits set by the IRS. All your IRA contributions (traditional or Roth) count towards the annual IRA contribution limit, so if you’re already exceeding that, you may not be able to.
What can I invest in a Roth IRA?
A Roth IRA is a retirement account that offers a variety of investment options such as stocks, bonds and funds. Some good Roth IRA investments include actively-managed funds, and dividend and growth stocks. However, the IRS does place some restrictions on what you can’t invest in a Roth IRA. That includes collectibles, life insurance and property for personal use. Think about your financial goals and time horizon before selecting assets for your Roth IRA to maximize your retirement savings.
How is a Roth IRA taxed?
Contributions to Roth IRAs are made with money you’ve already paid taxes on. A great feature of a Roth IRA is that if you follow the rules for a qualified distribution, you don’t need to pay any tax on either the money you put into a Roth IRA or the earnings on that money. You may need to pay additional taxes if you make an early withdrawal, rollover money from a pre-tax account into your Roth IRA or engage in transactions or investments prohibited by the IRS.
Roth Conversion Ladder
A Roth conversion ladder is an investment approach where you convert a portion of your retirement savings from one kind of retirement savings account into a Roth IRA. You do this over time instead of converting all of the savings at once.
Backdoor Roth IRA
A backdoor Roth individual retirement account (IRA) is an IRA funded from a traditional IRA through a "backdoor" route that skirts Roth IRA upper-income limits.
Spousal Roth IRA
A spousal Roth IRA is an individual retirement account that belongs to a non-income earning spouse. Because the IRS requires IRA contributions from taxable income, a non-earning spouse would otherwise be unable to contribute to a Roth IRA. The Spousal Roth IRA is an exception that allows non-earning spouses to deposit to a tax-advantaged retirement account with tax-free distributions later on.
Custodial Roth IRA
A custodial Roth IRA is a tax-advantaged retirement account for minors that allows them to invest income they earn and reap the benefits of compounded growth for years to come. Custodial Roth IRAs are managed by a designated custodian (usually a parent) until the account owner turns 18 years old (or 21 years in some states).
A Roth IRA is a double-tax-advantaged retirement savings account that offers tax-free earnings growth and tax-free distributions. Given these tax perks, opening a Roth IRA is a smart way to invest and grow your money, so that you may become financially independent by the time you retire.
Self-Directed Roth IRA
A self-directed Roth IRA is an individual retirement account that allows you to make investment choices that aren’t permitted with a typical Roth or traditional IRA. It lets you place non-traditional assets such as real estate, cryptocurrency, precious metals, or promissory notes within your retirement fund.
Roth IRA Basis
A Roth IRA basis is the total amount of money you’ve contributed to your Roth IRA since opening the account. Knowing your Roth IRA basis can help you figure out if you’ll owe penalties on any distributions you take before age 59 ½.
A Roth IRA phaseout is the income level at which your contribution to these after-tax retirement savings accounts can be reduced or "phased out" completely. The amount you can invest each year is limited based on your filing status and your modified adjusted gross income (MAGI). The maximum income amount changes every year.
A qualified distribution allows you to avoid penalties, and taxes earnings on money withdrawn from a Roth retirement account. While you contribute after-tax money to Roth accounts, the IRS has specific requirements you must meet, or “qualifications,” to avoid paying taxes on withdrawals from such plans.
Inherited Roth IRA
An inherited Roth IRA is a retirement account that has been bequeathed to someone after the original account owner has died.
The Roth IRA 60-day rule is a window of time in which you can withdraw your earnings and not be penalized or taxed—but only if you redeposit the money or roll it over to another Roth IRA within 60 days.