What Is a Roth IRA?

Retirement planning is one of the most important aspects of wealth management— no matter your age.

And, like many subjects in the financial realm, there’s no one right way to save for your future. There are numerous investment vehicles to consider, including the Roth IRA.

A Roth IRA is a type of retirement account that offers unique benefits that can help individuals save for the future while enjoying tax advantages. In this article, we’ll get into exactly what a Roth IRA is and why it is worth exploring for your retirement goals.

What is a Roth IRA?

A Roth IRA is a type of retirement account that allows individuals to save for retirement and invest in various financial instruments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other options.

Contributions to a Roth IRA are made with after-tax income, meaning you don’t get an immediate tax deduction for your contributions. However, the main advantage of a Roth IRA lies in its tax-free growth potential and qualified distributions. While you’ll pay taxes on that income now, a Roth IRA allows you to reap the benefits without taxes in retirement.

A Roth IRA can be opened at various financial institutions such as banks, credit unions, brokerage firms, and online investment platforms like robo-advisors.

Roth IRA vs. Traditional IRA

You may also be familiar with traditional IRAs. Though they share the same key purpose, they function a little differently.

The most notable difference between the two is the tax treatment of contributions and withdrawals. With a traditional IRA, contributions are typically tax-deductible, but withdrawals in retirement are subject to income tax. In contrast, a Roth IRA provides no upfront tax deduction for contributions, but qualified withdrawals in retirement are entirely tax-free. This tax-free growth can make a substantial difference in your retirement savings.
Who can contribute to a Roth IRA?
Roth IRAs aren’t employer-sponsored, meaning that anyone with earned income can open and contribute to an account— provided you meet the eligibility requirements.

Contribution limits are based on modified adjusted gross income (MAGI). Exceeding these limits can reduce or eliminate contribution eligibility.

As of 2024, income limits are:

• $146,000 for single filers
• $230,000 for married couples filing jointly

There is no minimum age requirement to contribute to a Roth IRA, nor an age limit on making regular contributions.

Frequently Asked Roth IRA Questions

To help you better understand how these investment vehicles work, we’ve answered ten of the most common questions related to Roth IRAs.

1. What are the Roth IRA contribution limits?

For the tax year 2024, the contribution limit for a Roth IRA is $7,000 per year for individuals under 50 years old and $8,000 for individuals who are 50 years old or older.

Keep in mind that these limits are subject to change, so it’s essential to check the latest IRS guidelines.

2. Can I contribute to both a Roth IRA and a traditional IRA?

Yes, you can contribute to both a Roth IRA and a traditional IRA in the same year. However, the combined contributions to both accounts must not exceed the annual contribution limit.

3. Are there penalties for early withdrawals from a Roth IRA?

Since you’ve already paid taxes on the money, Roth IRA contributions— money you’ve put in the account— can be withdrawn at any time without penalty or taxes.

However, withdrawing earnings— interest earned on the account— before age 59½ may result in taxes and penalties unless it meets one of the exceptions.

4. Can I convert a traditional IRA into a Roth IRA?

Yes, you can convert a traditional IRA into a Roth IRA through a process called a Roth conversion. However, the converted amount is considered taxable income in the year of conversion, so you will owe taxes on the converted amount.

5. Can I contribute to a Roth IRA if I have a retirement plan through my employer?

Yes, you can contribute to a Roth IRA even if you have a retirement plan with your employer, such as a 401(k) or 403(b).

6. Can I contribute to a Roth IRA for my spouse?

Yes, if you are married and file a joint tax return, you can contribute to a Roth IRA for your spouse— even if your spouse doesn’t have earned income— as long as you meet the income eligibility requirements.

7. Can I withdraw my contributions from a Roth IRA at any time?

Yes, you can withdraw your contributions from a Roth IRA at any time without penalty or taxes. However, withdrawing earnings before age 59½ may result in taxes and penalties unless it meets certain exceptions.

8. Are there required minimum distributions (RMDs) for a Roth IRA?

Roth IRAs are not subject to required minimum distributions during the account owner’s lifetime. This allows for more flexibility in managing withdrawals and potentially preserving the account for future generations.

9. Can I contribute to a Roth IRA if I’m self-employed?

Yes, self-employed individuals can contribute to a Roth IRA, subject to the same contribution limits and eligibility requirements as those with other types of income.

10. What happens to a Roth IRA when the account owner passes away?

In the event of the account owner’s death, a Roth IRA can be inherited by a beneficiary. The rules regarding distributions and tax treatment depend on various factors, including the beneficiary’s relationship to the account owner.

Learn More About Roth IRAs

A Roth IRA can be a powerful retirement savings tool that offers unique benefits. By contributing after-tax income, individuals can enjoy tax-free growth and tax-free qualified withdrawals in retirement.

If you have additional questions or wish to open a Roth IRA, consult with a financial advisor for personalized guidance based on your specific circumstances. With the help of wealth management professionals, you can harness the advantages of a Roth IRA today and set yourself on the path to a financially secure retirement.