A Roth IRA is a retirement savings account where your money grows tax-free and you pay no taxes when you withdraw it in retirement

Unlike a traditional IRA, you fund a Roth IRA with after-tax dollars — money you've already paid income tax on. That means the money you put in doesn't reduce your taxable income this year. But once it's in the account, all growth and withdrawals in retirement are tax-free, as long as you follow the rules. You can also withdraw the money you contributed (not the earnings) at any time without penalty, which makes a Roth IRA different from most retirement accounts.

The trade-off is that your income has to be below a certain level to open one. The income limits change every year and depend on whether you file taxes as single or married. For 2024, if you're single, you can contribute the full amount if your income is under $146,000. If you're married filing jointly, the limit is $230,000. Above those numbers, your contribution amount phases out or you can't contribute at all.

Key Takeaways

  • You can open a Roth IRA at a bank, brokerage, or credit union — the institution holds the account, not the government.
  • For 2024, you can put up to $7,000 per year into a Roth IRA if you're under 50, or $8,000 if you're 50 or older.
  • You must have earned income (from a job or self-employment) in the year you contribute, and your income must be below the annual limit.
  • You can withdraw money you contributed anytime without penalty, but earnings can only come out tax-free after age 59½ and if the account has been open at least five years.
  • The deadline to contribute for any tax year is the tax filing deadline the following year, usually April 15.

Where to open a Roth IRA account

You open a Roth IRA through a financial institution, not through the government. Your choices include banks, brokerages, credit unions, and robo-advisors. Each one holds your account and lets you invest the money inside it. The institution you choose doesn't affect your tax treatment — that's determined by the IRS rules for Roth accounts — but it does affect what investments you can buy and what fees you pay.

Banks typically offer Roth IRAs that hold savings accounts or CDs, which are very safe but earn low interest. Brokerages like Fidelity, Vanguard, Charles Schwab, and E*TRADE let you buy stocks, bonds, mutual funds, and ETFs. Credit unions often offer similar options to banks. Robo-advisors like Betterment or Wealthfront automatically invest your money in a mix of funds based on your age and risk tolerance. Compare the investment options, fees, and account minimums before you choose. Many brokerages have no account minimum and no annual fee.

Income limits and how they affect your contribution

The IRS sets income limits for Roth IRA contributions each year. If your income is below the limit, you can contribute the full amount. If your income falls in a phase-out range, you can contribute a reduced amount. If your income is above the phase-out range, you cannot contribute to a Roth IRA that year.

For 2024, the limits are: single filers with income under $146,000 can contribute fully; income between $146,000 and $161,000 means a reduced contribution; income $161,000 or above means no contribution. For married filing jointly, the limits are under $230,000 (full), $230,000 to $240,000 (reduced), and $240,000 or above (no contribution). These numbers increase slightly each year. Your income for this purpose is your modified adjusted gross income (MAGI), which is usually your gross income minus certain deductions — your tax return or tax software will calculate it.

How much you can contribute each year

The annual contribution limit is set by the IRS and changes periodically. For 2024, you can contribute up to $7,000 per year if you're under age 50. If you're 50 or older, you can contribute an additional $1,000 as a "catch-up" contribution, for a total of $8,000. These limits apply to all your IRAs combined — if you have both a Roth IRA and a traditional IRA, your total contribution to both cannot exceed the annual limit.

You can only contribute money you earned that year. Earned income means wages from a job, net income from self-employment, or taxable alimony. It does not include investment returns, rental income, or Social Security. If you earned $4,000 that year, you can only contribute $4,000 to a Roth IRA, even if the annual limit is higher.

The steps to fund your Roth IRA

Once you've chosen an institution and opened the account, funding it is straightforward. You transfer money from your bank account to the Roth IRA. Most institutions let you link your bank account online and initiate an electronic transfer, which usually takes three to five business days. Some institutions also accept checks or wire transfers.

You can contribute all at once or spread contributions throughout the year. Many people set up automatic monthly transfers so they don't have to remember. The deadline to contribute for any tax year is the tax filing deadline the following year — usually April 15. So you can contribute for 2024 anytime between January 1, 2024, and April 15, 2025. The institution will report your contribution to the IRS, so keep records of how much you put in and when.

What happens to your money once it's in the account

After you fund the account, you choose what to invest the money in. At a bank, your options might be a savings account or CD. At a brokerage, you can buy individual stocks, mutual funds, ETFs, or bonds. The institution provides tools or a platform to make these choices. Your money grows over time through interest, dividends, or capital gains, and you pay no taxes on that growth while it's in the Roth IRA.

You can change your investments anytime without tax consequences. You can also move money between Roth IRAs at different institutions — this is called a rollover or transfer. If you move money between IRAs of the same type (Roth to Roth), there are no tax consequences. If you move money from a traditional IRA to a Roth IRA, that's called a conversion, and you owe taxes on the amount converted in that year.

Rules for withdrawing money from your Roth IRA

The money you contribute to a Roth IRA can be withdrawn anytime, tax-free and penalty-free. This is one of the biggest advantages of a Roth IRA — you have access to your contributions if you need them. However, the earnings (the growth on your money) cannot be withdrawn before age 59½ without owing taxes and a 10% penalty, with some exceptions.

To withdraw earnings tax-free and penalty-free, two conditions must be met: you must be at least 59½ years old, and your Roth IRA must have been open for at least five tax years. The five-year rule is per account, not per contribution — once you've had any Roth IRA open for five years, the rule is satisfied for all your Roth IRAs. There are exceptions to the early withdrawal penalty for things like a first home purchase (up to $10,000 lifetime), disability, or medical expenses, but these exceptions don't apply to earnings in most cases.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA?

Yes, you can have both. However, your total contribution to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a Roth IRA, you can only contribute $3,000 to a traditional IRA that year (assuming the limit is $7,000). Both accounts count toward the same annual limit.

What if my income is too high for a Roth IRA?

If your income exceeds the phase-out range, you cannot contribute directly to a Roth IRA. However, you may be able to do a "backdoor Roth" conversion: contribute to a traditional IRA (which has no income limit) and then convert it to a Roth IRA. This strategy has tax implications and works best with the help of a tax professional or financial advisor.

Do I have to invest the money, or can I leave it in cash?

You can leave it in cash if the institution offers a money market account or savings option. However, cash earns very little interest. Most people invest at least part of their Roth IRA to grow their money over time. You can choose how much to invest and how much to keep in cash.

What if I contribute more than the annual limit by mistake?

You should withdraw the excess contribution and any earnings on it as soon as possible. If you don't, you may owe a 6% excise tax on the excess amount each year it remains in the account. Contact your financial institution to request a withdrawal of excess contributions.

Can I open a Roth IRA for my child?

Yes, if your child has earned income. A child can open a Roth IRA and contribute up to the amount they earned that year (or the annual limit, whichever is less). A parent can help manage the account, but the child must have earned the income themselves — it cannot come from an allowance or gift.