What Is a Roth IRA?

The Roth IRA is the rock star of retirement accounts. It’s easy to set up, simple to maintain, and comes with tax advantages that help you build wealth and boost your retirement savings over the long haul.

A Roth IRA (aka individual retirement account) is a retirement account that allows you to save a certain amount each year for retirement. It comes with some sweet tax advantages, including tax-free growth and tax-free withdrawals once you retire.

Whenever you see the words tax and free together, that’s something to get excited about!

So now that you know what a Roth IRA is, let’s dig a little deeper.

How Does a Roth IRA Work?

When you put money into your Roth IRA, you’ve already paid taxes on it. Why is that important? It means you won’t pay any taxes when you use that money in retirement. The growth in your Roth IRA and any withdrawals you make after age 59 1/2 are tax-free, as long as you’ve had the account more than five years.¹

Remember: Your Roth IRA is not an investment in itself—it only holds your investments and protects them from taxes. You can put all kinds of different investments into your Roth IRA. We’ll talk about what’s best to invest in a little later.

Something else to keep in mind: A Roth IRA is separate from your employer-sponsored retirement savings plan. Some employers offer Roth 401(k) plans, but we’ll talk about the difference between a Roth IRA and a Roth 401(k) in a bit.

What Are the Benefits of a Roth IRA?

Let’s start with the tax impact. When you make contributions after taxes, that means you’ve already paid taxes on the money you set aside for retirement. That helps your retirement savings go a lot further, faster because they grow tax-free.

So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when you withdraw that money in retirement! That’s a huge perk, especially for folks who expect to be in a higher tax bracket when they retire. Talk about a win!

Here are a few more benefits of a Roth IRA:

• You’re not required to take distributions at a certain age, unlike the traditional IRA (which requires withdrawals beginning at age 72).² 
• You can keep contributing to your Roth IRA if you choose to work past retirement age, as long as your income still falls within the income limits we’ll discuss a little later. 
• You can choose beneficiaries to inherit your Roth IRA, and they’ll be able to use the money in the account tax-free as well.

How Much Money Do You Need to Start a Roth IRA?

The great thing about Roth IRAs is that you don’t need to invest a ton of money to open an account. In fact, the IRS doesn’t require a minimum amount to open a Roth IRA. Most mutual fund companies require an account minimum to open one, but you can start a Roth IRA with as little as $50 in most cases. 

That means there’s no need to put off investing, people! Once you’re out of debt with a fully funded emergency fund, you can dive right in and start investing 15% of your income for retirement.

Can You Lose Money in a Roth IRA?

The short answer is, yes. There’s always an element of risk when you invest, but you can minimize your risk by spreading out your investments evenly across four different types of growth stock mutual funds: growth and income, growth, aggressive growth, and international. That way, you’ll balance and diversify your portfolio between higher-risk investments and more steady and predictable ones.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

And listen, if the market has a bad day, don’t panic and take all your money out of the investments in your Roth IRA. That’s the worst thing you can do because all you’re doing is locking in your losses. And if you actually withdraw all the money from your Roth IRA, you’ll get hit with a slew of taxes and penalties if you’re under age 59 1/2! Don’t do it!

Investing in the stock market is like riding a roller coaster—the only people who get hurt are the ones who jump off. The investors who keep their cool and give their money time to grow are the ones who get to the end of the ride safe and sound. When in doubt, reach out to an investment pro for guidance!

Roth IRA vs. Traditional IRA: How Do They Compare?

Do you have a hard time remembering the difference between a Roth IRA and a traditional IRA? You aren’t alone. While both types of IRAs help people save for retirement, the main difference between a Roth IRA and a traditional IRA is how they’re taxed.

• Roth IRAs are funded with after-tax dollars, and that means your investments grow tax-free. And you can use the money in your Roth IRA tax-free when you retire.
• Traditional IRAs are funded with pretax money, so you get a tax break now, but you’ll have to pay taxes on any money you withdraw in retirement.

Take a look at a side-by-side comparison:

Traditional IRA	Roth IRA
In most cases, contributions are tax deductible.	Contributions are not tax deductible.
There are no annual income limits on contributions.	In 2022, you could contribute up to the maximum amount if your gross income is less than $129,000 for single and head of household filers, and $204,000 for married couples.3 In 2023, the limit jumps to $138,000 for single and head of household filers, and $218,000 for married couples filing jointly.4
You must make annual withdrawals from your IRA after you turn 72.	No withdrawals are required if you are the original owner.
You must pay taxes on withdrawals in retirement.5	You are not taxed on withdrawals in retirement.

What Are the 2023 Contribution Limits?

You knew there had to be a catch! Unfortunately, Uncle Sam says you can’t just put as much money as you want into an IRA. For 2023, the total amount you can contribute to either a Roth IRA or a traditional IRA is $6,500—or $7,500 if you’re age 50 or older.⁶ If you're considering rolling over your 401(k) to a Roth IRA, though, we have good news! Rolling over your money doesn't count towards your contribution limit. Just be sure to check with your financial advisor about how rolling over your retirement can affect taxes. 

What Are Roth IRA Income Limits?

A Roth IRA offers some great tax benefits, but those benefits aren’t available for everyone. Once your income reaches a certain amount, you’ll either have to contribute a reduced amount or not contribute at all.

Income Restrictions if Single

For 2023, single tax filers must have a modified adjusted gross income (MAGI) of less than $138,000 to contribute the maximum amount of $6,500 ($7,500 if age 50 or older) to a Roth IRA.⁷

What if you make more than $138,000? If your MAGI is between $138,000 and $153,000, you can still contribute, but the amount you can contribute is gradually reduced as your MAGI approaches $153,000.

Once you’re making more than $153,000 as a single filer, you can’t contribute to a Roth IRA.⁸ If your income is too high to contribute to a Roth IRA, you can contribute to a traditional IRA because it doesn’t have income limits.

Income Restrictions if Married Filing Jointly

Married couples filing jointly must have a modified AGI of less than $218,000 to contribute the max to a Roth IRA. After that, you may qualify to make reduced contributions if your MAGI is between $218,000 and $228,000.⁹

If you have a MAGI of $228,000 or higher, you’re not eligible to make Roth IRA contributions.¹⁰

If your filing status is...	And your modified AGI is...	Then you can contribute...
Married filing jointly or qualifying widow(er)	Less than $218,000 (2023)	Up to the limit
Married filing jointly or qualifying widow(er)	Between $218,000 and $228,000 (2023)	A reduced amount
Married filing jointly or qualifying widow(er)	Greater than $228,000 (2023)	Zero
Married filing separately and you lived with your spouse at any time during the year	Less than $10,000	A reduced amount
Married filing separately and you lived with your spouse at any time during the year	Greater than $10,000	Zero
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	Less than $138,000 (2023)	Up to the limit
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	Between $138,000 and $153,000 (2023)	A reduced amount
Single, head of household, or married filing separately and you did not live with your spouse at any time during the year	Greater than $153,000 (2023)	Zero

If your income exceeds the eligibility limits, good for you—but bad for your ability to open a Roth IRA. You won’t be able to stash your cash in a Roth, but a traditional IRA might be an option. Tax benefits for traditional IRAs have different eligibility requirements, so check with your investing pro to see if it’s a good choice for you.

If you’re self-employed, here’s another option: Establish a Simplified Employee Pension (SEP) or a Solo 401(k) plan. Or if you run a small company with employees, consider a SIMPLE IRA that will allow you and your team members to save for retirement.

Am I Eligible to Contribute to a Roth IRA?

Do you earn income? And is it less than the Roth income requirements? If you answered yes to both of those questions, then you’re eligible.

However, you can’t contribute more than you make. So, if your 19-year-old son or daughter earned $3,000 waiting tables over the summer, they can only contribute up to $3,000 to a Roth IRA. It’s also okay for you to contribute the $3,000 on their behalf.¹¹

Another perk: There are no age restrictions with Roth IRAs. Whether you’re 17 years old or you just turned 92, you can contribute to your account as long as you’re earning an income.

Can I Set Up a Roth IRA for My Spouse Who Doesn’t Work?

Yes, your spouse who doesn’t work can open a Roth IRA. If you file a joint income tax return and at least one of you has taxable income, you can both contribute to your own separate Roth IRAs. But the IRS income-eligibility limits still apply.

Let’s say 40-year-old John makes $150,000 and his wife, Kate, stays home with their kids. John can put up to $6,500 in his IRA. Kate can open a spousal IRA in her name and contribute the maximum amount of $6,500 as well.

Is a Roth IRA the Same Thing as a Roth 401(k)?

Nope, a Roth IRA and a Roth 401(k) are not the same. But your contributions to both accounts are taxed the same way. Adding the word Roth to the name of either savings plan means the money you contribute will be taxed up front, grow tax-free, and can be withdrawn tax-free after age 59 1/2.

But there are a couple big differences between the two plans that we have to talk about. First, you can contribute a lot more to a Roth 401(k) each year than an IRA (about three times more for most people). 

Second, Roth 401(k) plans are sponsored by employers. Most companies offer an employer match on your Roth 401(k)—which is great news for you! But keep in mind that the match is not tax-favored. That means the growth from your employer’s match will be taxed when you withdraw your funds in retirement.

If your job offers you a Roth 401(k) with a match, take it! You can contribute to both a Roth IRA and a Roth 401(k) at the same time.

How Do I Set Up a Roth IRA?

The best way to open a Roth IRA is with the help of an investment professional who will meet with you face to face. Before you meet with your investment pro, you’ll need to gather some information and fill out the application. Here’s what you’ll need:

• Your driver’s license or other form of photo identification
• Your Social Security number
• Your bank’s routing number and your checking or savings account number
• Your employer’s name and address

As part of the process of starting a Roth IRA, you’ll also choose a beneficiary (or beneficiaries) who will inherit your account if something happens to you. You’ll need their name, Social Security number and date of birth.

Next, you can make your initial deposit and/or set up automatic contributions. You can open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month. You can actually do both as long as you don’t exceed the contribution limit for that year.

What Should My Roth IRA Be Invested In?

You can invest in almost anything through your Roth IRA, but we recommend mutual funds because they have the highest potential for helping you build wealth over time—especially with a Roth IRA’s tax benefits.

If you feel lost when it comes to picking mutual funds, an investment professional can help you find good growth stock mutual funds with a history of strong returns.

How Do I Maintain My Roth IRA?

Once you choose the mutual funds for your Roth IRA, it’s important to stick with them for the long haul. Like we said before, don’t panic when the market ebbs and flows. Your Roth IRA account balance will rise and fall with the stock market, but over its lifetime, you should see a steady growth trend. Just keep up your regular contributions and stick with your plan no matter what the market is doing.

Over 30 years, if you invest the annual max into a Roth IRA, it could grow to $1.4 million. (Historically, the 30-year return of the S&P 500 has been roughly 10–12%.¹²) The best part is, your contributions would only total $180,000, and the rest—$1.2 million—would be tax-free growth.

Those numbers can change depending on how much you invest, how long you have until retirement, and what you expect your annual return to be. You can use our investment calculator to customize those details for your own financial situation.

I’m Ready to Start! Now What?

Opening a Roth IRA is as easy as opening a checking account. The best way to get started is to contact an investment professional who can guide you through the set-up process.

If you don’t have a financial professional, reach out to a SmartVestor Pro in your area. They’re committed to educating and empowering you to make the best decisions possible for your retirement future.

Find your SmartVestor Pro today!