What Is a Roth IRA and How Do You Use It?
When opening an investment account with a brokerage, you’ll likely come across the option to open a Roth IRA. This retirement account is incredibly popular due to its unique tax advantages, allowing your money to grow tax-free. If you’re looking for a smart way to save for retirement, here’s what you need to know about the Roth IRA and how it works.
Key Points:
A Roth IRA is a retirement account that allows you to contribute after-tax dollars and withdraw money tax-free in retirement.
The 2024 contribution limit is $7,000 (or $8,000 if you're 50 or older).
Income limits apply—high earners may have reduced contribution limits or be ineligible.
You can withdraw contributions anytime tax-free, but earnings withdrawals before age 59 ½ may incur taxes and penalties unless they qualify for an exception.
To make tax-free withdrawals, your account must be open for at least 5 years, and you must be 59 ½ or older.
What Is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a special type of retirement account that allows you to contribute after-tax dollars, meaning you pay taxes on the money before you invest it. The biggest advantage? When you withdraw the money in retirement (after age 59 ½), both your contributions and earnings come out completely tax-free, as long as you follow the rules.
Because of this powerful tax benefit, there are certain income limits and contribution restrictions you need to be aware of.
Contribution Limits for 2024
The IRS sets annual contribution limits for Roth IRAs. For 2024, the limits are:
$7,000 per year for individuals under 50
$8,000 per year for individuals 50 and older (catch-up contribution)
Income Limits for Roth IRA Contributions
Your ability to contribute to a Roth IRA depends on your Modified Adjusted Gross Income (MAGI). If you earn too much, your contribution may be reduced—or you may not be able to contribute at all.
For Single Filers in 2024:
Full contribution if MAGI is $146,000 or less
Partial contribution if MAGI is between $146,000 – $161,000
No contribution if MAGI is above $161,000
For Married Filing Jointly (MFJ) in 2024:
Full contribution if MAGI is $230,000 or less
Partial contribution if MAGI is between $230,000 – $240,000
No contribution if MAGI is above $240,000
If you exceed these income limits, you may still be able to contribute using a Backdoor Roth IRA strategy.
Withdrawal Rules: When Can You Access Your Money?
The magic number for Roth IRA withdrawals is age 59 ½, but there’s another key rule: the five-year rule.
Qualified vs. Nonqualified Distributions
A qualified distribution means you can withdraw money tax-free and penalty-free if:
You are 59 ½ or older
Your Roth IRA has been open for at least 5 years
A nonqualified distribution means you may owe taxes and a 10% penalty on any earnings if you withdraw early. However, you can always withdraw your original contributions (not earnings) at any time, tax- and penalty-free.
There are some exceptions to the early withdrawal penalty, such as using funds for a first-time home purchase (up to $10,000), higher education expenses, or medical expenses.
Final Thoughts
A Roth IRA is one of the most powerful retirement tools available, offering tax-free growth and withdrawals in retirement. If you qualify, it can be an excellent way to build wealth for the future. Just be sure to follow contribution limits, income restrictions, and withdrawal rules to maximize its benefits.