A Roth IRA is a retirement account where you can put in money you’ve already paid taxes on. The good thing about a Roth IRA is that the money you put in and the money you earn can grow without being taxed, and you can take it out without being taxed after you’re 59½, as long as you’ve had the account for at least five years. This means you pay taxes on the money you put in, but not on the money you take out later.
Roth IRAs and traditional IRAs are alike, but the main difference is how they are taxed. Roth IRAs are funded with money that has already been taxed. While contributions to traditional IRAs can be tax-deductible, withdrawals from Roth IRAs are tax-free.
How Does Roth IRA Works?
You can invest money that has already been taxed into a Roth IRA. This money will grow, and when you take it out in retirement, you won’t owe any more taxes.
You can fund a Roth IRA from various sources:
- Regular contributions
- Spousal IRA contributions
- Transfers
- Rollover contributions
- Conversions
Roth IRA contributions must be in cash, such as checks or money orders, not securities or property. The IRS sets annual deposit limits for all types of IRAs, which are the same for traditional and Roth IRAs. These limits apply to all your accounts combined, so you can’t exceed the maximum contribution amount.
Like other retirement accounts, money in a Roth IRA grows tax-free. Unlike other accounts, a Roth IRA has fewer restrictions. The account holder can keep the Roth IRA forever without having to take out a minimum distribution during their lifetime, unlike 401(k)s and traditional IRAs.
On the other hand, when you make deposits to a traditional IRA, you typically use money that hasn’t been taxed yet. You can usually deduct your contribution from your taxes, but you’ll have to pay income tax when you take the money out in retirement.
Eligible for a Roth IRA
Version 1: People with earned income can contribute to a Roth IRA if they meet specific requirements for filing status and modified adjusted gross income (MAGI). If their annual income exceeds a certain amount set by the IRS, they cannot contribute. The chart displays the 2023 and 2024 figures.
| Category | Income Range for 2023 Contribution | Income Range for 2024 Contribution |
| Married and filing a joint tax return | Full: Less than $218,000 Partial: From $218,000 to less than $228,000 | Full: Less than $230,000 Partial: From $230,000 to less than $240,000 |
| Married, filing a separate tax return, lived with spouse at any time during the year | Full: $0 Partial: Less than $10,000 | Full: $0 Partial: Less than $10,000 |
| Single, head of household, or married filing separately without living with spouse at any time during the year | Full: Less than $138,000 Partial: From $138,000 to less than $153,000 | Full: Less than $146,000 Partial: From $146,000 to less than $161,000 |
This is how it works: If someone earns below the specified range for their category, they can contribute a maximum of 100% of their income or the contribution limit, whichever is lower.
People in the phaseout range should deduct their income from the maximum level, then divide that by the phaseout range to find out the percentage they can contribute.
Conclusion
A Roth IRA is a retirement account that lets you take out money tax-free after age 59½ and after owning the account for five years. You can also withdraw penalty-free for certain reasons like buying a home, paying for college, or having a child.
Roth accounts are funded with money that has already been taxed. This means you won’t receive a tax break when you contribute, but you can take out your contributions without having to pay federal or state income tax, as long as you meet the withdrawal criteria.
Roth IRAs can be a good choice for those who expect to be in a higher tax bracket later in life or during retirement, since the money is not taxed when withdrawn, unlike with a 401(k) or traditional IRA.