IRA Roths
A Roth IRA is a retirement account you fund with after-tax dollars, then all growth and qualified withdrawals in retirement are tax-free. Unlike traditional IRAs, you never deduct Roth contributions, but you also never pay tax on distributions after age 59½ if the account has been open at least five years.
How do I open and fund a Roth IRA?
Open a Roth IRA by choosing a broker or custodian (Fidelity, Vanguard, Schwab, or your bank), completing an application online in 10-15 minutes, and linking your checking account for transfers. You can fund the account immediately by electronic transfer, typically clearing in 1-3 business days.
Common mistakes: contributing when you earn too much (the IRS will assess a 6% excess contribution penalty annually until you withdraw it), or waiting until December 31st thinking that's the deadline when you actually have until April 15th to max out the previous year.
What investments can I hold inside a Roth IRA?
Your Roth IRA can hold stocks, bonds, mutual funds, ETFs, CDs, and money market funds—most publicly traded securities are allowed. You choose and manage the investments yourself or select a target-date fund that automatically adjusts as you age.
The account itself is just a tax-advantaged wrapper; the growth comes from what you buy inside it. A Roth IRA holding cash earns minimal interest, while one holding a diversified stock index fund historically returns 7-10% annualized over decades.
When can I withdraw money from a Roth IRA without penalty?
You can withdraw your original contributions anytime, at any age, tax-free and penalty-free because you already paid tax on that money. Earnings withdrawals are tax-free and penalty-free only if you're at least 59½ and the account has been open for five years (the "five-year rule" starts January 1 of the year you made your first Roth contribution, regardless of the month).
Exceptions exist: you can withdraw up to $10,000 in earnings penalty-free for a first-time home purchase, or use earnings for qualified education expenses or certain medical costs (you'll still pay income tax on early earnings withdrawals, but the 10% penalty is waived). If you become disabled or the account passes to a beneficiary at your death, the penalty also doesn't apply.
Track contributions versus earnings carefully. If you contributed $30,000 over ten years and the account grew to $50,000, you can always take out that $30,000; the $20,000 in earnings is where age and time restrictions apply.
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How does a Roth IRA compare to a traditional IRA?
A traditional IRA gives you a tax deduction now (lowering this year's taxable income) but you pay ordinary income tax on all withdrawals in retirement. A Roth IRA offers no deduction now but tax-free withdrawals later.
Roth IRAs have no required minimum distributions (RMDs) during your lifetime, while traditional IRAs force you to start withdrawals at age 73 (as of 2024). Income limits prevent high earners from contributing directly to a Roth, but traditional IRA contributions are always allowed regardless of income (though the deduction phases out if you're covered by a workplace retirement plan).
The "backdoor Roth" strategy lets high earners contribute to a non-deductible traditional IRA, then immediately convert it to a Roth, sidestepping income limits. Consult a tax professional before attempting this if you have existing pre-tax IRA balances, as the pro-rata rule can create an unexpected tax bill.
What happens to a Roth IRA if I change jobs or move?
Your Roth IRA stays with you for life—it's not connected to any employer. Job changes, career breaks, relocations across state lines, even moving abroad don't affect the account.
If you have a Roth 401(k) from a previous employer, you can roll it into your Roth IRA, consolidating accounts and often expanding your investment choices. This rollover doesn't count toward your annual contribution limit.
FAQ
Can I contribute to a Roth IRA if I have a 401(k)?
Yes, having a 401(k) doesn't prevent Roth IRA contributions. You must stay within the income limits ($161,000-$176,000 single, $240,000-$260,000 married filing jointly for 2024), but the two accounts are independent and you can fund both in the same year up to their respective limits.
What if I contribute to a Roth IRA and then earn too much?
You'll owe a 6% excess contribution tax each year the money remains in the account. Remove the excess contribution and any earnings it generated before your tax deadline to avoid the penalty.
Do state taxes apply to Roth IRA withdrawals?
Most states follow federal treatment and don't tax qualified Roth IRA distributions. A few states (California, Pennsylvania) tax conversions from traditional to Roth, but withdrawals from an established Roth are generally state-tax-free.
Can I open a Roth IRA for my child?
Yes, if the child has earned income (wages from a job, self-employment income). The child can contribute up to their total earned income or $7,000 for 2024, whichever is less.
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Model long-term contributions with the Roth IRA calculator
A Roth IRA account is funded with after-tax money, so contributions do not generally create a federal income-tax deduction. Qualified distributions can receive favorable federal tax treatment when applicable requirements are met. A projection adds planned contributions to the current balance and applies an assumed return. Market performance, fees, contribution timing, and withdrawals can make actual results materially different from the estimate.
Roth IRA contribution limits and income eligibility rules can change, so check current IRS guidance rather than relying on an older limit. When comparing a traditional IRA vs Roth IRA, consider current tax treatment, possible deductions, future distribution rules, and required minimum distribution rules. A Roth IRA vs 401k comparison should also address employer matching, investment choices, fees, creditor protections, and access to money. Complex conversion strategies may create tax consequences.
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