Roth Individual Retirement Accounts (Roth IRAs)

Roth IRAs are retirement accounts that allow for tax-free withdrawals in certain cases. Learn how Roth IRAs work, if they make sense for you and strategies to use them.

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.

Key Terms

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