What is a Roth IRA? The complete guide

By: Team Stash
Published: Jun 26, 2024
• Updated: Jun 09, 2026

In this article:

1. How do Roth IRAs work?
2. Roth IRA contributions
3. Roth IRA distributions
4. Investment choices in a Roth IRA
5. Pros and cons of a Roth IRA
6. Roth IRA vs. traditional IRA vs. 401(k)
7. Is investing in a Roth IRA right for you?

There are many types of investment accounts you can use to grow your money for retirement or other goals. One of the main reasons investors choose a Roth IRA is the potential for tax advantages later in life: if you expect to be in a higher tax bracket after you retire, you can benefit from your contributions being taxed at a lower rate when you invest now compared to the higher tax rate you expect in the future.

How do Roth IRAs work?

Investors contribute to their Roth IRA with after-tax dollars, which means they’ve already paid taxes on them. That money then grows tax-free; once you reach age 59½, qualified distributions of your contributions and earnings are tax-free.

A Roth IRA can be opened at many banks, brokerage companies, federally insured credit unions, and savings and loan institutions. While investors can open a Roth IRA at any time, contributions for a tax year are required to take place by the investor’s tax-filing deadline, which is normally April 15 of the following year.

Roth IRA contributions

There are several ways investors can go about getting started with a Roth IRA and a number of eligibility requirements they have to consider.

Who is eligible to open a Roth IRA?

Anyone who earns income can contribute to a Roth IRA, regardless of age. However, the IRS sets income eligibility limits for Roth IRAs. At higher income levels, investors may be able to contribute to a traditional IRA but not a Roth IRA.

What is the max contribution to a Roth IRA?

For 2024, investors under 50 can contribute a maximum of $7,000 to their Roth IRA, and those 50 and older can make up to $8,000 in contributions. However, that limit may be reduced based on your income and tax filing status.

As of 2024, single filers with an annual adjusted gross income (AGI) under $146,000 can contribute the full amount allowed by the IRS. Single filers earning between $146,000 and $161,000 can contribute, but the contribution limit is lower. And those earning $161,000 or more are not eligible to contribute to a Roth IRA. If you’re married and filing jointly or a qualifying widower, your combined AGI must fall below $230,000 to contribute fully; if your AGI is $230,000 or less than $240,000, the amount you can contribute is lower. These income limits are updated periodically by the IRS.

Notably, these investment limits apply to all IRA accounts you have combined, both Roth and traditional IRAs.

Exceptions to Roth IRA contribution limits

There are a few special circumstances that will affect your Roth IRA contributions.

• Employer contributions: Some small businesses and self-employed individuals can open a SEP-IRA or SIMPLE IRA. These plans allow them to contribute to their employees’ retirement; keep in mind that there are generally limits on employer contributions.

• Spousal IRA contributions: Generally, taxable compensation is required in order to contribute to a Roth IRA. However, if you’re married and file your taxes jointly, a spouse who doesn’t earn any income can open a spousal IRA, and the working spouse can contribute to that account up to the annual limit.

How to contribute to a Roth IRA

• Regular contributions: Regular contributions must be made in cash and can’t include property, securities, rental income, or interest income.
• Transfers: A transfer, also called a direct transfer or a trustee-to-trustee transfer, means one Roth IRA custodian sends money directly to another Roth IRA custodian, and the money does not pass through an individual’s hands.
• Rollover contributions: Investors who have a Roth 401k can roll that money into a Roth IRA. Rollover contributions do not count towards their yearly contribution limit.

Roth IRA distributions

When can you withdraw from a Roth IRA?

There are two types of penalty-free distributions, or withdrawals, from your Roth IRA.

• Initial investment: The contributions you made can be withdrawn without paying taxes or penalties.
• Qualified distributions: A qualified distribution is a withdrawal that takes place at least five years after you started making contributions and is taken when you are either at least 59½ years old, or you are disabled as defined by the IRS, or the distribution is to a beneficiary of your estate following your death.

Early distribution penalties

If you withdraw earnings that don’t meet the rules for a qualified distribution, you’ll have to pay income tax on that money, plus a 10% penalty tax.

Investment choices in a Roth IRA

Investments you can make in your Roth IRA include:

• Individual stocks
• Individual bonds
• Exchange-traded funds (ETFs)
• Index funds
• Mutual funds

Pros and cons of a Roth IRA

Benefits of a Roth IRA

• Tax-free growth: Investors enjoy tax-free growth on their investments.
• Can withdraw contributions before retirement: You can withdraw your contributions anytime without any penalties.
• Flexible timing: Investors can contribute up to their limit during the tax year.

Drawbacks of a Roth IRA

• No tax-deductible contributions: You cannot deduct your contributions from your taxable income.
• Income limit: If you earn more than the income limits, the amount of money you can contribute will be reduced.
• Low maximum contribution: The maximum contributions you can make to a Roth IRA are relatively low.

Roth IRA vs. traditional IRA vs. 401(k)

Is investing in a Roth IRA right for you?

A Roth IRA can make a lot of sense at certain points in your life, but whether or not it’s right for you comes down to how much money you’re making now and how much you expect to make when you stop working.

Investors are allowed to have all these investment vehicles at the same time.