Roth IRA

What Is a Roth IRA?

A Roth individual retirement account (IRA) is an investment vehicle that helps you save for retirement in a tax-advantaged way. Essentially, Roth IRAs offer the potential for tax-exempt growth of your savings.

At a high level, the process works as follows:

1. Contributions are made on an after-tax basis. No tax deductions are provided for the contributions you make.
2. Your contributions are invested and allowed to grow free of tax, which can have a powerful compounding effect over the long term.
3. In retirement, as you make withdrawals on the contributions and accumulated earnings, no income taxes are imposed.

Roth IRAs are one of the most powerful retirement savings vehicles available. For younger savers with their peak earning years in the future, small contributions can become a powerful asset after years of growth.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Roth IRAs: Pros vs. Cons

Roth IRAs have more advantages than disadvantages. Moreover, the disadvantages can be largely avoided through careful planning and fiscal discipline. The pros and cons provided below illustrate the primary things you should consider about Roth IRAs.

Who Is Eligible for a Roth IRA?

Whether you are eligible to contribute to a Roth IRA depends on your filing status and modified adjusted gross income (MAGI). If you have earned income – including taxable income and wages earned from working for someone else, yourself or from a business you own – you are likely able to contribute. However, people with higher incomes may not be eligible to contribute.

Income Limits

The amount of your allowed contribution to a Roth IRA is reduced or eliminated as your income increases.

The amount you are allowed to contribute to a Roth IRA is based on your MAGI, which takes your adjusted gross income and adds back in a handful of exclusions and deductions, such as tax-exempt interest income and student loan interest you pay.

2025 Roth IRA Contribution Limits

FILING STATUS	MAGI	CONTRIBUTION LIMIT
Married filing jointly or qualifying widow or widower	Less than $246,000	Up to age 50, $7,000, 50 and older, $1,000
Married filing jointly or qualifying widow or widower	$236,000 up to $246,000	A reduced amount
Married filing jointly or qualifying widow or widower	More than $246,000	$0
Married filing separately, but you lived with your spouse at any point during the year	Less than $10,000	A reduced amount
Married filing separately, but you lived with your spouse at any point during the year	$10,000 or more	$0
Single, head of household or married filing separately and did not live with you spouse any time during the year	Less than $150,000	Up to age 50, $7,000, 50 and older, $1,000
Single, head of household or married filing separately and did not live with you spouse any time during the year	$150,000 up to $165,000	A reduced amount
Single, head of household or married filing separately and did not live with you spouse any time during the year	$165,000 or more	$0

Types of Roth IRAs

Roth IRAs offer a flexible and tax-advantaged way to save for retirement, but not everyone can take advantage of them in the same way. There are various types of Roth IRAs, each with its unique features and eligibility criteria.

What Is a Backdoor Roth IRA?

The MAGI guidelines outlined previously seem to suggest that Roth IRA participation is not permitted for high-income earners. However, the tax code contains a loophole that allows savers to circumvent the restrictions by using a “backdoor Roth IRA.” This isn’t an official type of IRA. Rather, it’s a reference to an approach that entails funding a traditional IRA with after-tax dollars and, subsequently, converting the contribution into a Roth IRA.

After moving the money around, the outcome is the same as if you were making a direct contribution to a Roth IRA. Not everyone can execute the backdoor method; complicated limitations exist. Please work with a tax professional to assess your particular situation.

Spousal Roth IRA

A spousal Roth IRA is a retirement savings account for a non-working or low-income spouse. They can contribute to a Roth IRA based on their working spouse’s earned income. Contributions are made using after-tax dollars, and qualified withdrawals made during retirement are tax-free, providing couples with potential tax benefits. 

The IRS requires that the couple be married, file a joint tax return and meet income eligibility requirements to qualify for a spousal Roth IRA. The working spouse must have earned income equal to or greater than the total contribution made to both their own Roth IRA and the spousal Roth IRA.

How Do You Open a Roth IRA?

You can open a Roth IRA through a brokerage firm, such as Charles Schwab, E-Trade or Fidelity Investments, or through a banking institution. Generally, you will have many more investment options if you open a Roth IRA with a brokerage firm. Bank offerings are often limited to certificates of deposit and other savings accounts.

If you open a Roth IRA, the financial institution will provide you with two important documents. These papers outline the regulations and policies that govern your IRA account and create a binding contract between you and the IRA trustee or custodian. Read and fully understand the contents of these documents to know your rights and obligations as an account holder.

Important Roth IRA Documents

IRA Disclosure Statement

The disclosure statement is a document that outlines the rules of a financial transaction in clear, easy-to-understand language. 

IRA Adoption Agreement and Plan Document

This is a contract between you — the owner of the IRA — and the financial institution where the account is held. This document describes specific rules of your IRA and must be signed before the Roth IRA becomes valid. It contains elements of your basic personal information, such as your address, date of birth and Social Security number. 

If you work with a financial advisor on your retirement planning, they can help guide you through the process. In most cases, the process will involve leveraging your existing brokerage and banking framework.

Roth IRA Contribution Limits

A Roth IRA is a tax-advantaged retirement account. Contributions are not tax-deductible, but earnings can grow tax-free if certain conditions are met. This can greatly facilitate your ability to save for retirement.

For 2025, the annual contribution limit to a Roth IRA is $7,000 for people under the age of 50 and an additional $1,000 catch up contribution for people over the age of 50. This is an aggregate limit that applies to all IRAs you own. You can continue to make regular contributions to a Roth IRA at any age, but all contributions must come from earned income.

“You don’t need to have significant wealth to invest,” says Marguerita Cheng, Chief Executive Officer of Blue Ocean Global Wealth. “You can start with just $50 per month, but you do need to invest consistently to build significant wealth.”

Roth IRA Withdrawal Rules

A qualified distribution from a Roth IRA is one that is made at least five years after the account was established and on or after the date you reach age 59 ½. If these conditions are met, all withdrawals from a Roth IRA are exempt from income tax.

However, if the IRS conditions for a qualified distribution are not met, a 10% federal tax penalty could apply and any earnings you withdraw could also be subject to taxation. The financial consequences are most stringent for those who take money out before the age of 59 ½.

Specific instances can exempt you from these withdrawal guidelines. These include withdrawals made for a first-time home purchase or to pay for college expenses.

Qualified family members — including a child, grandchild or parent — can also benefit from the $10,000 first-time homebuyer withdrawal exception. 

Other exceptions allow you to receive a distribution without penalty if you become disabled. And if you’ve had your Roth IRA for at least five years, your beneficiary can receive the IRA’s assets tax-free if you die.

For Roth IRAs, the IRS does not have required minimum distributions, which means there is no deadline for making a withdrawal. If the money is not needed yet, you can continue to let it grow tax-exempt. This can result in a significant economic benefit for your heirs.

Non-Qualified Distributions

Withdrawals that don’t meet the qualified distribution rules are considered non-qualified distributions. 

Examples of Non-Qualified Roth IRA Distributions

• Inheriting a Roth IRA and not meeting the required distribution rules as a non-spouse beneficiary.
• Inheriting a Roth IRA that was less than five years old at the time of the account holder’s death.
• Taking distributions within the first five years of opening the Roth IRA account.
• Using money in the Roth IRA to pay for medical insurance — unless you are unemployed.
• Withdrawing earnings before the account owner reaches age 59½.

Roth IRA Allowable Investments

IRAs can hold a variety of assets, including stocks, bonds, alternative investments, cash and fund-style vehicles containing various combinations of assets. As a result of this flexibility, you can use an IRA to achieve virtually any investment objective, whether it’s growth, income, a balance of growth and income, or capital preservation.

Though IRAs are flexible in what types of assets they can hold, the IRS specifically prohibits IRAs from holding life insurance contracts, collectibles and certain derivative instruments. Further, if you want to put gold or cryptocurrency inside a Roth IRA, you’ll have to open an account specifically designed to house those assets.

Investment Considerations

Before making any type of investment, you need to carefully consider your unique circumstances and your tolerance for risk, which is largely determined by your time horizon.

A longer investing horizon gives you the ability to withstand more ups and downs in the market than someone who is on the verge of retirement. This means you can seek higher returns to boost the growth potential of your retirement savings.

Accordingly, savers who have a lot of years before retirement should consider investing more of their portfolios in growth-oriented stocks, with less investment in dividend-focused stocks and interest-bearing bonds. Over time and as you transition toward retirement, these allocations should shift, bringing you toward a more traditionally conservative allocation of 60% stocks and 40% bonds.

No matter how you choose to invest your portfolio, you should aim to maintain a high degree of diversification within each of the primary asset classes. An efficient way to do so is via index mutual funds or exchange-traded funds. These low-cost, fund-style vehicles are highly liquid and fairly easy to understand because they track well-known indices, such as the Standard & Poor’s 500 index (the S&P 500) and the Bloomberg U.S. Aggregate Bond Index.

Roth IRAs and Traditional IRAs

In addition to the Roth structure, IRAs are available in a traditional structure. As discussed earlier, with a Roth vehicle, there is no upfront tax deduction on your contributions. The contributions are invested and grow during your working years. Then, in retirement, all withdrawals are free from taxation.

Conversely, with a traditional vehicle, contributions are generally tax-deductible in the year in which they are made. The contributions are invested and grow during your working years. You may still have to pay IRA fees with either Roth and traditional IRAs.

Which Is Better?

When assessing whether it makes more sense to invest in a Roth IRA or a traditional IRA, the most important consideration is whether you expect to be in a higher tax bracket during your working years or during your retirement years. A Roth IRA works best if you expect to be in a higher tax bracket during your retirement years, while a traditional IRA is preferred if you expect to be in a higher tax bracket during your working years.

Unfortunately, given the highly unpredictable nature of economic cycles, geopolitical events and tax legislation, projecting your future tax rate is nearly impossible. With this in mind, it’s generally recommended to assign a portion of your retirement savings to Roth-style vehicles and a portion to traditional-style vehicles.

This framework is fairly easy to manage and, more importantly, will enable you to maintain flexibility with regard to taking your future income distributions in a tax-efficient manner. During low-income years, withdrawing from your traditional account is smart because this money has never been taxed. Conversely, in high income years, it’s better to withdraw from your Roth account because the distributions are tax-exempt.

Read More: Roth IRA Calculator

FAQs About Roth IRAs

Melanie Pincus contributed to this article.