What Are the Restrictions on Roth IRAs?

Roth IRA restrictions include contribution and income limits

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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.

Key Takeaways

  • A Roth IRA can help you save for retirement by contributing after-tax dollars, which then grow tax-free.
  • You must meet income and other requirements to contribute to a Roth IRA.
  • To make withdrawals from a Roth IRA, you must have held the account for at least five years. If you’re not older than 59 ½ or eligible for an exemption, you may be subject to a penalty fee.
  • Certain types of trading and assets are forbidden in Roth IRAs.

Restrictions on Roth IRA Investments

Roth IRAs are highly flexible, letting investors hold many different types of assets, including stocks, bonds, 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.

Note

If you break these rules, you may be deemed to have taken an immediate distribution from your IRA, which can incur taxes and penalties.

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 59 ½, 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 59 ½  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 59 ½  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 distributed—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.

Income Requirements

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

Filing Status Full Contribution Partial Contribution No Contributions Permitted
Single or head of household Less than $129,000 $129,000 to $143,999 $144,000 or more
Married, filing jointly Less than $204,000 $204,000 to $213,999 $214,000 or more

Note

If you’re married and file separately, your contribution amounts depend on income and whether you lived with your spouse for any portion of the year.

To contribute, you must have earned income for the year, and you can’t contribute more than you earned.

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.

If you qualify for the full contribution based on your income and filing status, you can contribute the lesser of $6,000 or the amount of earned income you had for the year. If you’re over age 50, you can contribute up to $7,000 if you have sufficient income.

Frequently Asked Questions (FAQs)

What are the restrictions on MLP and REIT investments in a Roth IRA?

The IRS doesn’t restrict investors from buying real estate investment trusts (REITs) or master limited partnerships (MLPs) in a Roth IRA as long as they abide by the other rules. For example, you can’t own a home you occupy in your Roth IRA, even if it’s part of a REIT you own.

When can you withdraw from a Roth IRA?

You can make withdrawals from a Roth IRA without paying penalties only if you’ve held the account for at least five years. If you meet that requirement, you can make the withdrawals if:

  • You’re withdrawing only contributions, not earnings, or
  • You’re 59 ½ or older

You can withdraw earnings tax-free before turning 59 ½ in some scenarios, such as:

  • You withdraw up to $10,000 to buy your first home.
  • You spend the money on qualified education expenses.
  • You become disabled.
  • You spend the money on unreimbursed medical expenses or on health insurance while you’re unemployed.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. “Retirement Topics: Prohibited Transactions.”

  2. IRS. “Retirement Topics: Plan Assets.”

  3. IRS. “Issue Snapshot: Investments in Collectibles in Individually-Directed Qualified Plan Accounts.”

  4. IRS. “Publication 590-B: Distributions From Individual Retirement Arrangements (IRAs),” Pages 31-32.

  5. Charles Schwab. “Roth IRA Withdrawal Rules.”

  6. IRS. “Amount of Roth IRA Contributions That You Can Make for 2022.”

  7. IRS. “Retirement Topics: IRA Contribution Limits.”

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