What Are the Restrictions on Roth IRAs?

Roth IRAs are popular investing accounts that help people save for retirement. Taxpayers contribute after-tax dollars and ideally don’t withdraw the money until they retire. During the intervening years, the money in a Roth IRA can grow tax-free.

While Roth IRAs are powerful tools for retirement savings, they come with some rules and restrictions to keep in mind. Here are the Roth IRA restrictions to consider before opening an account.

Restrictions on Roth IRA Investments

Roth IRAs are highly flexible, letting investors hold many different types of assets, including stocks, bonds, exchange traded funds (ETFs), mutual funds, and even real estate. However, special rules apply to some assets, and other types of assets can’t be held in a Roth IRA at all.

For example, if an investor chooses to own real estate in their Roth IRA, they can’t live on the property or allow related parties such as their parents, siblings, or children to benefit from it. The property must be solely an investment. You also can’t transfer real estate to an IRA by selling it to yourself or a trust you benefit from, and you can’t use property in an IRA as security for a loan.

Assets you can’t own in a Roth IRA include life insurance and collectibles, such as antiques, art, rugs, gems, stamps, and alcohol.

Five-Year Restriction on Roth IRA Withdrawals

One advantage of Roth IRAs is that you may withdraw your contributions from the account without paying taxes or penalties, even if you haven’t yet reached retirement age. Once you reach age 59½, you’ll get the full benefit of the account and can withdraw both contributions and earnings without paying taxes or fees.

The exception is if you’ve had the Roth IRA for less than five years. Roth IRAs have a five-year waiting period from the time you open the account until you can make unrestricted withdrawals.

If you’re under age 59½  and withdraw money from a Roth IRA, you’ll have to pay taxes and penalties unless you meet specific requirements, such as:

• You are totally and permanently disabled.
• You’re withdrawing up to $10,000 to purchase your first home.
• You’re paying health insurance premiums while you’re unemployed.

If you're 59½  or older and have had your IRA for less than five years, you won’t pay a penalty for making withdrawals, but you will owe taxes on your earnings.

No Borrowing From or Against Your Roth IRA

IRS rules forbid investors to use money in Roth IRAs as collateral to secure loans. The penalty for breaking this rule is that any amount used as collateral is treated as a distribution, which means you’d pay taxes and fees.

The IRS also forbids you to borrow money from your Roth IRA.

No Margin Trading Allowed

Margin trading means using the balance of your brokerage account as collateral to borrow money from your broker and using those borrowed funds to invest. Margin gives you more purchasing power and can increase your investment gains or losses.

The same IRS rules that forbid investors from using IRA balances as loan collateral prevent trading on margin in a Roth IRA.

Other Prohibited Transactions

The IRS also prohibits other kinds of transactions in Roth IRAs, including the improper use of the account by its owner, their beneficiary, their fiduciary, and their fiduciary’s family members. For example, a fiduciary can’t make changes to plan income or assets in their own best interest.

Eligibility and Contribution Restrictions for Roth IRAs

You must meet some eligibility requirements to contribute to a Roth IRA. To contribute, you must have earned income for the year, and you can’t contribute more than you earned.

Income Requirements

If your income exceeds a set limit, the amount you can contribute to a Roth IRA starts to decrease or phase out until it reaches $0.

Below are the 2023 income phase out ranges for a Roth IRA.

Contribution Limits

Once you meet the income requirements to make Roth IRA contributions, you’ll face limits on the amount you can contribute each year.

• In 2022, you can contribute $6,000 for the year, and if you’re age 50 and older, you qualify for a $1,000 catch-up contribution for a total of $7,000.
• In 2023, you can contribute $6,500, and if you’re age 50 and older, you can contribute $7,500, including the catch-up contribution.

Frequently Asked Questions (FAQs)

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!