Roth IRA

A Roth IRA is a type of investment account designed to help you save for retirement. It does so by offering tax-exempt growth on the contributions you make — as long as you don’t touch the earnings prior to retirement age.

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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Expert

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Updated: August 24, 2023
  • 12 min read time
  • This page features 10 Cited Research Articles
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What Is a Roth IRA?

A Roth individual retirement account (IRA) is an investment vehicle that helps you save for retirement in a tax-advantaged way. Essentially, Roth IRAs offer the potential for tax-exempt growth of your savings.

At a high level, the process works as follows:

  1. Contributions are made on an after-tax basis. No tax deductions are provided for the contributions you make.
  2. Your contributions are invested and allowed to grow free of tax, which can have a powerful compounding effect over the long term.
  3. In retirement, as you make withdrawals on the contributions and accumulated earnings, no income taxes are ever imposed.

Roth IRAs are one of the most powerful retirement savings vehicles available. For younger savers with their peak earning years in the future, small contributions can become a powerful asset after years of growth.

Roth IRAs: Pros vs. Cons

Roth IRAs have more advantages than disadvantages. Moreover, the disadvantages can be largely avoided through careful planning and fiscal discipline. The pros and cons provided below illustrate the primary things you should consider about Roth IRAs.

Roth IRAs: Pros vs. Cons


  • Auto contributions can facilitate disciplined savings for individuals inclined to spend
  • Can house a wide variety of diverse assets, including stocks, bonds, alternative investments and cash
  • Can be implemented in a low-cost, passive manner with minimal hands-on effort
  • Tax-exemption allows for powerful effect of enhanced compound growth of earnings
  • Contributions can be withdrawn penalty-free anytime
  • Savings can be used for certain purposes without incurring an early distribution penalty
  • Unlike traditional-style retirement vehicles, there are no IRS required minimum distributions


  • Annual contributions are limited to only $6,500 for individuals ($7,500, if age 50 or older)
  • Eligibility is reduced/eliminated at higher incomes, but a backdoor funding solution exists
  • Generally, a 10% penalty applies for distributions of earnings taken prior to age 59 1/2

Who Is Eligible for a Roth IRA?

Whether you are eligible to contribute to a Roth IRA depends on your filing status and modified adjusted gross income (MAGI). If you have earned income – including taxable income and wages earned from working for someone else, yourself or from a business you own – you are likely able to contribute. However, people with higher incomes may not be eligible to contribute.

Income Limits

Per the Internal Revenue Service (IRS), anyone with earned income can open and contribute to a Roth IRA and reap the benefits of tax-exempt growth on earnings. However, the amount of your allowed contributions is reduced or eliminated as your income increases.

The amount you are allowed to contribute to a Roth IRA is based on your modified adjusted gross income (MAGI), which takes your adjusted gross income and adds back in a handful of exclusions and deductions, such as tax-exempt interest income and student loan interest you pay.

2023 Roth IRA Contribution Limits

Married filing jointly or qualifying widow or widower Less than $218,000 Up to age 50, $6,500, 50 and older, $1,000
Married filing jointly or qualifying widow or widower $218,000 up to $228,000 A reduced amount
Married filing jointly or qualifying widow or widower More than $228,000 $0
Married filing separately Less than $10,000 A reduced amount
Married filing separately $10,000 or more $0
Single, head of household or married filing separately and did not live with you spouse any time during the year Less than $138,000 Up to age 50, $6,500, 50 and older, $1,000
Single, head of household or married filing separately and did not live with you spouse any time during the year $138,000 up to $153,000 A reduced amount
Single, head of household or married filing separately and did not live with you spouse any time during the year $153,000 or more $0

Source: U.S. Internal Revenue Service

For the 2023 tax year, the limits set by the IRS for single filers can be summarized as follows: A full Roth IRA contribution is permissible when your MAGI is less than $138,000. A reduced contribution is permissible when your MAGI is $129,000 or more, but less than $153,000. If your MAGI is $153,000 or higher, no Roth IRA contribution is permitted.

Similar limitations apply to married filers, but the MAGI levels depend on whether you’re filing jointly or separately. For detailed information, please refer to the IRS rules for 2023 Roth IRA Income Limits.

What Is a Backdoor Roth IRA?

The MAGI guidelines outlined previously seem to suggest that Roth IRA participation is not permitted for high-income earners. However, the tax code contains a loophole that allows savers to circumvent the restrictions by what’s known as a “backdoor Roth IRA.” This isn’t an official type of IRA. Rather, it’s a reference to an approach that entails funding a traditional IRA with after-tax dollars and, subsequently, converting the contribution into a Roth IRA.

After moving the money around, the outcome is the same as if you were making a direct contribution to a Roth IRA. It’s important to note that not everyone can execute the backdoor method; complicated limitations exist. Please work with a tax professional to assess your particular situation.

Spousal Roth IRA

A spousal Roth IRA is a retirement savings account for a non-working or low-income spouse. They can contribute to a Roth IRA based on their working spouse’s earned income. Contributions are made using after-tax dollars, and qualified withdrawals made during retirement are tax-free, providing couples with potential tax benefits. 

The IRS requires that the couple be married, file a joint tax return and meet income eligibility requirements to qualify for a spousal Roth IRA. The working spouse must have earned income equal to, or greater than the total contribution made to both their own Roth IRA and the spousal Roth IRA.

How Do You Open a Roth IRA?

You can open a Roth IRA through a brokerage firm, such as Charles Schwab, E-Trade or Fidelity Investments, or through a banking institution. Generally, you will have many more investment options if you open a Roth IRA with a brokerage firm. Bank offerings are often limited to certificates of deposit and other savings accounts.

If you open a Roth IRA account, the financial institution will provide you with two important documents. These papers outline the regulations and policies that govern your IRA account and create a binding contract between you and the IRA trustee or custodian. It’s important to read and fully understand the contents of these documents to know your rights and obligations as an account holder.

Important Roth IRA Documents

IRA Disclosure Statement
The disclosure statement is a document that outlines the rules of a financial transaction in clear, easy-to-understand language. 
IRA Adoption Agreement and Plan Document
This is a contract between you — the owner of the IRA — and the financial institution where the account is held. This document describes specific rules of your IRA and must be signed before the Roth IRA becomes valid. It contains elements of your basic personal information, such as your address, date of birth and Social Security number. 

If you work with a financial advisor on your retirement planning, they can help guide you through the process. In most cases, the process will involve leveraging your existing brokerage and banking framework.

More: Roth IRA vs. 401(k)

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How Do Roth IRAs Work?

A Roth IRA is a retirement account where contributions are made with after-tax dollars, allowing for potential tax-free growth and tax-free qualified withdrawals in retirement. Contributions are not tax-deductible, but earnings can grow tax-free if certain conditions are met – meaning they offer potential long-term tax advantages for retirement savings.

Contribution Limits

For 2023, the annual contribution limit to a Roth IRA is $6,500 for people under the age of 50 and an additional $1,000 catch up contribution for people over the age of 50. This is an aggregate limit that applies to all IRAs you own. You can continue to make regular contributions to a Roth IRA at any age, but all contributions must come from earned income.

“You don’t need to have significant wealth to invest,” says Marguerita Cheng, Chief Executive Officer of Blue Ocean Global Wealth. “You can start with just $50 per month, but you do need to invest consistently to build significant wealth.”


Besides annual contributions, you can also add to a Roth IRA by rolling over funds from another retirement account, such as a Roth 401(k) plan. That said, certain rollovers can trigger tax liabilities. Before executing a rollover contribution, be sure to fully assess the potential outcome.

Withdrawal Rules

Per the IRS, a qualified distribution from a Roth IRA is one that is made at least five years since the account was established and on or after the date you reach age 59 ½. If these conditions are met, all withdrawals from a Roth IRA are exempt from income tax.

However, if the IRS conditions for a qualified distribution are not met, a 10% federal tax penalty could apply and any earnings you withdraw could also be subject to taxation. The financial consequences are most stringent for those who take money out before the age of 59 ½.

Specific instances can exempt you from these withdrawal guidelines. These include withdrawals made for a first-time home purchase or to pay for college expenses.

Qualified family members — including a child, grandchild or parent — can also benefit from the $10,000 first-time homebuyer withdrawal exception for building a new home. 

Other exceptions allow you to receive a distribution without penalty if you become disabled. And if you’ve had your Roth IRA for at least five years, your beneficiary can receive the IRA’s assets tax-free if you die.


In certain situations, early withdrawal of earnings is permissible. For example, if you make an early withdrawal to pay for the first-time purchase of a home, medical bills or expenses for higher education, the penalty may not apply.

For Roth IRAs, the IRS does not have required minimum distributions, which means there is no deadline for making a withdrawal. If the money is not needed yet, you can continue to let it grow tax-exempt. This can result in a significant economic benefit for your heirs.

Non-Qualified Distributions

Withdrawals that don’t meet the qualified distribution rules are considered non-qualified distributions. 

Examples of Non-Qualified Roth IRA Distributions

  • Inheriting a Roth IRA and not meeting the required distribution rules as a non-spouse beneficiary or if the IRA is less than five years old at the time of the account holder’s death.
  • Paying for education expenses besides tuition, fees, books, supplies or equipment required for a student’s attendance at an eligible educational institution.
  • Taking distributions within the first five years of opening the Roth IRA account.
  • Using money in the Roth IRA to pay for medical insurance — unless you are unemployed.
  • Withdrawing earnings before the account owner reaches age 59½.

Roth IRA Allowable Investments

IRAs can hold a wide variety of assets, including stocks, bonds, alternative investments, cash and fund-style vehicles containing various combinations of assets. As a result of this flexibility, you can use an IRA to achieve virtually any investment objective, whether it’s growth, income, a balance of growth and income or capital preservation.

Though IRAs are flexible in what types of assets they can hold, the IRS specifically prohibits IRAs from holding life insurance contracts, collectibles and certain derivative instruments. Further, if you want to put gold or cryptocurrency inside a Roth IRA, you’ll have to open an account specifically designed to house those assets.

Investment Considerations

Before making any type of investment, you need to carefully consider your unique circumstances and your tolerance for risk, which is largely determined by your time horizon. If you plan on working for at least another seven to 10 years, your investing horizon is relatively long.

A long investing horizon gives you the ability to withstand more ups and downs in the market than someone who is on the verge of retirement. This means you can seek higher returns to boost the growth potential of your retirement savings.

Accordingly, you should consider investing more of your portfolio in growth-oriented stocks, with less investment in dividend-focused stocks and interest-bearing bonds. Over time and as you transition toward retirement, these allocations should shift, bringing you toward a more traditionally conservative allocation of 60% stocks and 40% bonds.

No matter how you choose to invest your portfolio, you should aim to maintain a high degree of diversification within each of the primary asset classes. An efficient way to do so is via index mutual funds or exchange-traded funds. These low-cost, fund-style vehicles are highly liquid and fairly easy to understand because they track well-known indices, such as the Standard & Poor’s 500 index, also known as the S&P 500 Index, and the Bloomberg U.S. Aggregate Bond Index.

Learn More: The Best Roth IRA Accounts

Roth IRAs and Traditional IRAs

In addition to the Roth structure, IRAs are available in a traditional structure. As discussed earlier, with a Roth vehicle, there is no upfront tax deduction on your contributions. The contributions are invested and grow during your working years. Then, in retirement, all withdrawals are free from taxation.

Conversely, with a traditional vehicle, contributions are generally tax-deductible in the year in which they are made. The contributions are invested and grow during your working years. You may still have to pay IRA fees with either Roth and traditional IRAs.

Which Is Better?

When assessing whether it makes more sense to invest in a Roth IRA or a traditional IRA, the most important consideration is whether you expect to be in a higher tax bracket during your working years or during your retirement years. A Roth IRA works best if you expect to be in a higher tax bracket during your retirement years, while a traditional IRA is preferred if you expect to be in a higher tax bracket during your working years.

Unfortunately, given the highly unpredictable nature of economic cycles, geopolitical events and tax legislation, projecting your future tax rate is nearly impossible. With this in mind, it’s generally recommended to assign a portion of your retirement savings to Roth-style vehicles and a portion to traditional-style vehicles.

This framework is fairly easy to manage and, more importantly, will enable you to maintain flexibility with regard to taking your future income distributions in a tax-efficient manner. During low-income years, withdrawing from your traditional account is smart because this money has never been taxed. Conversely, in high income years, it’s better to withdraw from your Roth account because the distributions are tax-exempt.

FAQs About Roth IRAs

Is it better to invest in a Roth IRA or a 401(k)?

A Roth IRA is often better than a 401(k) as it allows for longer investment growth, wider investment options and easier early withdrawals. However, 401(k)s may offer Roth contributions, in addition to a much higher contribution limits and potential company match.

How much money do you need to start a Roth IRA?

To open a Roth IRA with no minimum deposit, check out discount brokers and robo-advisors. But to get the tax benefits of a Roth IRA, you need to contribute money. The maximum contribution for 2023 is $6,500. There is an additional $1,000 catch-up contribution for those 50 years of age and older.

How much will a Roth IRA earn?

Roth IRAs themselves are not investments and do not generate interest or dividends. However, the investments held within a Roth IRA have the potential to earn a return over time.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: August 24, 2023

10 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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