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Roth IRAs: What they are, how they work and how to open one
Saving for retirement is important, but so is finding the right retirement account. You want something that fits your needs. While there are different retirement vehicles out there to build a nest egg, there are some important considerations before opening an account or managing withdrawals.
One type of retirement account is a Roth IRA, which offers some flexibility and tax benefits. However, there are also contribution limits and income requirements to consider — including new, higher limits for 2025. If you’re considering a Roth IRA or interested in rolling a pre-tax retirement account into a Roth IRA, here’s what to know about this retirement account, including how it works and the tax benefits it offers.
What is a Roth IRA?
A Roth IRA is an individual retirement account that uses after-tax dollars for your contributions. Because of that, you can’t deduct those contributions from your income taxes like you can with a traditional IRA. In exchange, your earnings and withdrawals in retirement end up being tax-free.
Additionally, with a Roth IRA, you don’t have to take a required minimum distribution like you would with a traditional IRA, and you can continue to fund the account past age 70 ½ if you have taxable compensation.
Previously, you couldn’t contribute to a traditional IRA past the age of 70 ½, but that changed in 2020, so now there aren’t age restrictions in place for contributing to either a Roth or traditional IRA.
How does a Roth IRA work?
A Roth IRA is one type of individual retirement account. Unlike an employer-sponsored plan like a 401(k), you can set up a Roth IRA on your own with an investment brokerage or financial institution if you’re eligible. You can contribute up to a set amount per year, based on IRS guidelines.
“When funding a Roth IRA, the contribution amounts do not provide any tax deferral like pre-tax, traditional IRAs do. Instead, all Roth IRA contributions use after-tax dollars,” explains Kelly Gilbert, owner of EFG Financial in Grand Rapids, MI. “This enables the account growth, usage and transfer to heirs to be tax-free, instead of taxed at withdrawal like traditional IRAs.”
To make Roth IRA contributions, you can:
Transfer funds from your bank account.
Set up automatic transfers.
Enroll in paycheck deductions with your employer.
Roll over another account, like a traditional IRA or 401(k).
Convert funds from a traditional IRA or eligible employment-sponsored retirement plan.
Depending on where you open an account, you may have the option to choose a self-directed Roth IRA or an automated Roth IRA. If you get a self-directed account, you can pick and choose the specific types of investments you want in the account. For example, stock, bonds and mutual funds. You can choose what makes sense given your risk tolerance and time horizon.
On the other hand, automated Roth IRAs are generally offered by so-called robo-advisors that manage your investment selection automatically based on your risk profile and preferences.
Rules and limitations
A Roth IRA is a solid retirement vehicle that can help you save for the future. But there are rules and limitations to consider, including:
Withdrawal rules. You must be 59 ½ and have the account for five years to withdraw earnings. However, you can withdraw your original contributions whenever you want without a tax hit or penalties.
Early withdrawal penalty. You’ll pay a fee equal to 10% of the withdrawal, unless there’s a qualified exception.
Income restrictions. You become ineligible if your modified adjusted gross income (MAGI) exceeds $161,000 for single tax filers (or $165,000 in 2025) and $240,000 for married filing jointly ($246,000 in 2025).
Taxes. Contributions use after-tax dollars and are not tax-deductible in the year you make them. In retirement, withdrawals are tax-free.
Age limits. You can regularly contribute to a Roth IRA, no matter your age.
Required minimum distribution. RMDs are not required from Roth IRAs until after the owner’s death.
First, you must meet the income requirements to be able to contribute to a Roth IRA. This is a major differentiator when comparing a Roth IRA to a traditional IRA.
Second, contribution limits cap how much you can put in the account each year. A Roth is a retirement account, so to dissuade you from tapping those funds early, there’s a 10% tax on any early distributions.
To avoid a 10% early withdrawal penalty, you must make what’s called a “qualified distribution” — which means having the account for a minimum of five years and withdrawing at 59 ½ or later.
However, some exceptions apply. For example, you can take a withdrawal from a Roth and take out up to $10,000 for a first-time home purchase or qualified higher education expenses.
Dig deeper: Golden years, golden gains: 7 best low-risk investments for retirees
How much can you contribute to a Roth IRA?
How much you can contribute to your Roth IRA is set by the Internal Revenue Service (IRS). In 2024, the maximum amount you’re allowed to contribute to a Roth IRA is $7,000. If you’re 50 and older, you’re eligible for a catch-up contribution of $1,000 more with a maximum of $8,000.
These limits can change from year to year due to inflation, but Roth IRA contributions limits for 2025 will not change. If you contribute over the limit, you must take out the excess or be at risk of paying 6% tax each year on the amount over the limit.
A trusted retirement or financial advisor can help you create a comprehensive retirement plan and investment portfolios to meet your goals, minimize taxes and suggest when you might want to retire or start receiving Social Security.
Get matched with a trusted financial advisor in 4 simple steps
Am I eligible to open a Roth IRA?
You’re eligible to open a Roth IRA if you earn income and meet the MAGI eligibility requirements. Currently, the cutoff point is $161,000 for single tax filers and $240,000 for married filing jointly.
If you earn less than that, you may be eligible to contribute the full amount of $7,000 (or $8,000 if you’re over 50) or a reduced amount as there’s a phaseout structure with Roth IRAs.
Here’s a general breakdown of how much you can contribute based on your MAGI and tax filing status for tax years 2024 and 2025.
2024 tax year
You can open and contribute to a Roth IRA for the 2024 tax year until Tuesday, April 15, 2025.
Tax filing status | Modified adjusted gross income (MAGI) | Contributions |
Single or head of household | Less than $146,000 | Full amount up to the limit |
Single or head of household | More than $146,000 but less than $161,000 | Lower amount |
Single or head of household | More than $161,000 | $0 — not eligible |
Married filing jointly | Less than $230,000 | Full amount up to the limit |
Married filing jointly | More than $230,000 but less than $240,000 | Lower amount |
Married filing jointly | More than $240,000 | $0 — not eligible |
2025 tax year
Roth IRA income and contribution limits are increasing for the 2025 tax year.
Tax filing status | Modified adjusted gross income (MAGI) | Contributions |
Single or head of household | Less than $150,000 | Full amount up to the limit |
Single or head of household | More than $150,000 but less than $165,000 | Lower amount |
Single or head of household | More than $165,000 | $0 — not eligible |
Married filing jointly | Less than $236,000 | Full amount up to the limit |
Married filing jointly | More than $236,000 but less than $246,000 | Lower amount |
Married filing jointly | More than $246,000 | $0 — not eligible |
Traditional IRAs don’t have income restrictions like a Roth IRA does. However, traditional IRAs and Roth IRAs have the same contribution limits.
Depending on where you open a Roth IRA, you may be subject to minimum deposits. However, some companies don’t have minimums to get started. For example, SoFi offers self-directed and automated Roth IRA with no minimum deposits and no commissions or management fees. Wealthfront has a small opening deposit requirement of $500 for its automated Roth IRA account and a small annual management fee of 0.25%.
How to open a Roth IRA
If you’re interested in using a Roth account as a retirement savings vehicle, here’s how to open a Roth IRA.
Review eligibility requirements. Based on your tax filing status and MAGI, see if you’re eligible to contribute to a Roth IRA and how much — whether full, partial or zero.
Compare options. You can open a Roth IRA with an investment brokerage or platform or bank. Compare three or more options and look at minimum deposits, website usability, potential fees and customer satisfaction.
Know your budget. Look at how much you can afford to put in a Roth IRA right now and know your monthly budget. It’s ideal to contribute up to the limit, if possible.
Choose a provider. After comparing your options, choose the provider you want to open a Roth IRA with so you can get started.
Create an account. Go to the provider’s website, create an account, provide personal information and request to open a Roth IRA.
Fund your account. Even if there are no minimum deposits, you need to actually contribute your Roth IRA to get a return on your investment. Transfer funds from your bank account or through a rollover or conversion. Set up automatic transfers to help max out your account.
Pick your investments. A Roth IRA is simply a type of account, not an investment itself, so you want to choose your investments for the account. If you go with a self-directed Roth IRA, make sure to pick your investments so your money is working for you. If you use a robo-advisor, your platform will handle the heavy lifting of building and managing your investment portfolio.
Dig deeper: How robo-advisors simplify and automate portfolio management
Benefits of a Roth IRA
A Roth IRA can be a good choice if you’re in a lower tax bracket currently and meet the income requirements. You can get the taxes out of the way now when you’re in a lower tax bracket, and then in retirement, you can withdraw with no tax consequences.
Here are some of the main benefits of a Roth IRA:
Tax-free. Both your earnings from compound interest and withdrawals are tax-free. Plus, your beneficiary who inherits the account typically won’t have to pay taxes either.
No required minimum distribution. A Roth IRA doesn’t require you to take distributions at a certain age. A Traditional IRA has a required minimum distribution at age 72 or 73. However, if a beneficiary inherits your Roth IRA, there must be a required minimum distribution.
Flexibility. Since you use after-tax funds to contribute to a Roth IRA, you can withdraw your contributions at any time. However, any earnings you withdraw can come with a tax penalty. There are also notable exceptions where you’re exempt from the tax penalty.
Drawbacks to a Roth IRA
The idea of not paying taxes on withdrawals in retirement is attractive to a lot of people. With a traditional IRA, you get tax benefits now and pay up later in retirement. A Roth IRA is the opposite — in other words, there’s no getting around paying taxes on your retirement withdrawals; rather, it’s a matter of time.
When comparing IRAs, consider the potential downsides of a Roth IRA:
Income restrictions. Depending on your tax filing status and MAGI, you may be ineligible to contribute to a Roth or only able to contribute a partial amount.
Not tax-deductible. The contributions you make to your Roth IRA aren’t tax-deductible, as is the case with a traditional IRA. In some cases, that could be an incentive to save now to reap the benefits.
Contribution limit. A Roth IRA has a relatively low contribution limit compared to employer-sponsored 401(k)s. The maximum you can contribute is $7,000 — or $8,000, if you’re 50 or older.
Dig deeper: Worried about outliving your savings? How to plan your retirement withdrawal strategy in 4 smart steps
At a glance: Roth vs. traditional IRA
Roth IRA | Traditional IRA | |
Funds | After-tax | Pre-tax |
Contribution limit | Yes | Yes |
Income limit | Yes | No |
Required minimum distribution | No | Yes |
When you pay taxes | Now | Later |
Tax-deductible contributions? | No | Yes |
Early withdrawal penalty | Yes | Yes |
Roth IRA rollover vs. Roth IRA conversion
A rollover is when you move or “roll over” funds from one retirement account to another retirement account. So for example, if you leave your job, you can transfer funds from your employer-sponsored 401(k) into a Roth IRA.
Be aware that since Roth uses after-tax funds, if you roll over an account with pre-tax money, you’ll need to pay taxes on the amount.
A Roth conversion is when you move money from one type of account to another type of account — for example, converting your traditional IRA to a Roth IRA. Since you’re transferring pre-tax money to post-tax money, you’re also responsible for taxes when doing a Roth IRA conversion.
When you roll over funds, you can ensure that your retirement savings aren’t in limbo and can move them to an appropriate account, while a conversion can help you maximize the tax benefits of a Roth IRA in retirement.
What is a backdoor Roth IRA?
If you’re ineligible to contribute to a Roth IRA, you can consider a backdoor Roth IRA. Through this process, you open a traditional IRA, which has no income restrictions and you can contribute as normal. Then, later on, you convert the traditional IRA to a Roth IRA so you can work around the limits.
“There are two ways to get money into a Roth IRA, and they both start with the letter C: contributions and conversions. A conversion is when you convert any amount from a pre-tax IRA into a Roth IRA,” explains Gilbert. “The only caveat is that in the year of the conversion you must pay the tax on the converted amount. Conversions can be used to circumvent the Roth contribution income limit because there is no income limit on Roth conversions. This strategy is sometimes referred to as the backdoor Roth.”
FAQ: Retirement, your savings and your future
Learn more about retirement accounts, withdrawals and saving for your future with these common questions.
Can I close my IRA and take the money?
Yes, you can withdraw your money and close your IRA at any time, but you’ll pay a tax penalty equal to 10% of the withdrawal amount if you’re not yet 59 ½. For a traditional IRA, your withdrawal is also taxed as ordinary or earned income.
Can I work while collecting Social Security?
Working during retirement can be a great way to stay active and social, and for many, it’s a necessity. But if you start receiving Social Security before you reach full retirement age, you may actually lose some of your benefits if you earn too much. Learn more about how work affects your Social Security benefits — including limits and tax implications.
What is the 4% rule for retirement?
The 4% rule of retirement is a popular guideline that aims to help you make your savings last throughout your golden years. The rule suggests you can safely withdraw 4% of your retirement portfolio balance each year, adjusted for inflation, without running out of money. But it’s not a perfect rule, and it’s not ideal for everyone. Learn more about the benefits and drawbacks of this guideline — including alternatives — in our guide to the 4% rule for retirement.
Sources
Retirement topics - IRA contribution limits, IRS. Accessed November 12, 2024.
Amount of Roth IRA contributions that you can make for 2024, IRS. Accessed November 12, 2024.
401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000, IRS. Accessed November 12, 2024.
About our writer
Melanie Lockert is an L.A.-born and Brooklyn-based freelance writer with a decade of experience in personal finance. Melanie started the Dear Debt blog in 2013 and chronicled her journey out of $81,000 in student loan debt. She published a book of the same name in 2016. Her personal finance expertise has been featured on Fortune Recommends, CNN Underscored, Yahoo Finance and Business Insider, among other publications. She is also the host of the Mental Health and Wealth Show and cofounder of the Lola Retreat, a finance event for women.
Article edited by Kelly Suzan Waggoner
