What Is a Roth IRA?

Roth IRAs Explained

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A Roth IRA is a double-tax-advantaged retirement savings account that offers tax-free earnings growth and tax-free distributions.

What Is a Roth IRA?

A Roth Individual Retirement Account (IRA) is a retirement savings account into which eligible individuals can contribute post-tax dollars. Unlike some retirement accounts that allow you to deduct contributions from your taxable income at the end of the year, money you add to your Roth IRA is taxed as income when you earn it. But the good news once money is in your account you'll pay no taxes on growth or on earnings before you retire, or on qualified distributions from the IRA after you retire.

The Roth IRA can suit almost any future retiree, but the traits of this type of account are best for those who are do not have access to an employer-sponsored 401(k) plan (or a plan offering a matching program), or those who are able to save more than the 401(k) plan limit allows. Also, there's no age at which account owners must begin to take money out of their Roth IRA. This makes the account a good choice for those who want to pass along wealth to their heirs or loved ones.

  • Alternate name: Roth Individual Retirement Account


Although you can't deduct Roth contributions from your taxes, you may be able to claim the Retirement Saver's Credit based on your adjusted gross income. This credit promotes savings among people who are low- and middle-income, helps them to increase the amount they save, and reduce taxes along the way.

How a Roth IRA Works

A Roth IRA functions as a traditional IRA, except that you pay into it with post-tax dollars (income after taxes have been deducted), and you can only add money if your modified adjusted gross income (MAGI) is less than a certain amount.

You can invest the money you add to a Roth IRA in assets of your choice, such as stocks, bonds, or mutual funds. The money you add to your Roth IRA won't reduce your taxable income, but the earnings will grow tax-free. In fact, you don't even have to report the earnings to the IRS.

Also, you don't have to pay taxes on much of the money that you withdraw either. This is true even after you retire and first tap your Roth IRA for income. "Qualified distributions" that do not get taxed are those you take after you reach age 59 1/2 and at least five years after the taxable year when you first added money to the Roth IRA. If you withdraw money outside of these times, such as if taken before the age of 59 1/2, you might pay an extra 10% penalty.

For example, suppose that Linda is 35 years old when she opens a Roth IRA. She decides to add $6,000 (after tax) to the account each year. Through the account she chooses to invest in assets that garner her a return of 6% each year. She cannot deduct that $6,000 from her taxable income, but at that rate of return, her account would be worth $474,349 in 30 years, when she's 65. She wouldn't lose any of that to taxes as long as when she takes money out it happens after the age of 59 1/2 (or for other qualifying reasons put aside by the IRS). Her take-home savings would be the full $474,349.


The IRS carves out some exceptions to the 10% fee on early withdrawals. You won't face the 10% penalty if you are disabled, if it's made to a beneficiary after your death, or for a few other niche reasons, as detailed in section 590-b of the tax code.

How Much Can I Contribute to a Roth IRA?

There are limits on how much you can add to your Roth IRA each year. Your maximum contribution to the account is the lesser of your taxable income for the year or $6,000, or $7,000 if you're 50 or older, for the 2021 and 2022 tax years. Taxable income includes wages, salaries, and net self-employment earnings, but it excludes the money you make from interest or dividends.

Even though the limit is set per year, you don't have to make the full contribution at once. You can make many smaller contributions, as long as the total amount doesn't exceed the limit for the year. You can even add to both a traditional IRA and a Roth IRA as long as the combined amount doesn't exceed the limit.

The amount you can add to a Roth IRA is further restricted by your modified adjusted gross income (MAGI) and your tax filing status. Roth IRA income limits will differ for people in each tax bracket. For example, in the 2021 tax year, single filers could make maximum Roth IRA contributions when their MAGI is less than $125,000. If their MAGI was less than $140,000 the limit was lower. If a single filer had a MAGI of $140,000 or more in 2021, there was a limit of zero (meaning they could not add money at all).

In 2022, single filers can make the maximum contribution if their MAGI is less than $129,000 in 2022, less if their MAGI is less than $144,000, and nothing at all if their MAGI is $144,000 or more.


Each Roth IRA contribution limit relates to a certain calendar year. You can add money to your Roth IRA from January 1 of that year until the filing deadline for your tax return, which in most years is April 15th.

How to Get a Roth IRA

You can open a Roth IRA at nearly any bank or brokerage house, either online or in person. Opening a Roth IRA is a simple process, and there are almost always people who can help you.

Most accounts can be opened with only a few forms to complete. You'll need to have a few things handy, such as your Social Security number, as well as the Social Security numbers and addresses of anyone you wish to name as a beneficiary.

Alternatives to a Roth IRA

If your income is too high to add directly to a Roth IRA, or if you're not ready to add much at all, you might want to look into a 401(k) first. If your employer sponsors a 401(k) account, they may offer a match, which can help grow your money faster. Also, any money you add to a 401(k) is pre-tax dollars, or in other words not taxed as income. The downside to a 401(k) is that you'll have to pay taxes when it's time to take money out. Roth 401(k) contributions allow you to avoid paying taxes on distributions.

Much like 401(k) plans, traditional IRAs also accept pre-tax dollars from people at all income levels, up to the same contribution limits as Roth IRAs. If you have both an IRA and a 401(k) through work, and if your income exceeds certain levels, the amount you can deduct may be capped. You can even use what is known as the "backdoor" Roth IRA strategy to convert traditional IRA contributions into Roth contributions. The catch is that you'll have pay taxes on the converted amount, as you'll be switching from a pre-tax to post-tax account.

Key Takeaways

  • A Roth IRA is a double-tax-advantaged retirement savings account that lets you avoid taxes on earnings growth and distributions.
  • The Roth IRA allows savers to exceed the annual contribution limit on a 401(k) or pass on assets to their heirs.
  • Limits apply to how much you can add to your account each year, and these are further reduced by your MAGI and tax filing status.
  • Traditional IRAs and 401(k) plans are other options, and high income earners may be able to bypass income limits through these accounts.
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  1. Internal Revenue Service. "Traditional and Roth IRAs." Accessed Dec. 12, 2021.

  2. Internal Revenue Service. "Retirement Savings Contributions Credit (Saver's Credit)." Accessed Dec. 12, 2021.

  3. Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Dec. 12, 2021.

  4. Internal Revenue Service. "About Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)." Accessed Dec. 12, 2021.

  5. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Accessed Dec. 12, 2021.

  6. Internal Revenue Service. "Income Ranges for Determining IRA Eligibility Change for 2021." Accessed Dec. 12, 2021.

  7. Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make For 2021." Accessed Dec. 12, 2021.

  8. Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2022." Accessed Dec. 12, 2021.

  9. Internal Revenue Service. "Roth Comparison Chart." Accessed Dec. 12, 2021.

  10. Internal Revenue Service. "Rollover to a Roth IRA or a Designated Roth Account." Accessed Dec. 12, 2021.

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