A Roth IRA is a type of individual retirement account. When you have a Roth IRA, you contribute after-tax dollars — up to a certain limit every year.

That money stays in your retirement investment account and can potentially earn investment returns as you work your way toward retirement. 

Roth IRAs are similar to traditional IRAs in many ways, but they come with some differences. Discover exactly how Roth IRAs work, including how to open one, how much you can contribute, and which potential advantages or disadvantages you should be aware of. 

How does a Roth IRA work?

In a lot of ways, Roth IRAs work like some other popular retirement savings plans, such as 401(k)s and traditional IRAs.

Here are some of the similarities you'll find between these types of plans:

• You choose to put some of your income into these plans now to save for retirement later.
• The money is a voluntary amount you can contribute each year, and you can change how much you contribute every year.
• You're limited by the Internal Revenue Code on how much you can contribute in any given year.
• The money is held in an investment account, so it has the potential for compound growth through the years. In the end, you hopefully end up with more than you contributed over the years.

Here are a few ways that Roth IRAs are different from other types of retirement plans:

• You contribute with after-tax dollars, which means you’ve already paid taxes on the money you contribute. Roth IRAs don't have required minimum distributions, which provides a bit more flexibility when it comes to managing your retirement savings.  
• You can withdraw your contributions at any time without a penalty because you’ve already paid taxes on the contribution amount.

Basics of Roth IRA accounts

We'll cover the details about how to open a Roth IRA account, the contribution and income limits, and how and when you can withdraw your funds.

But first, let's take a quick look at how Roth IRA accounts work overall:

• You open a Roth IRA account.
• You begin funding the Roth IRA,  a observing annual contribution limits.
• Your funds remain in the account and are invested, potentially increasing in total through compound growth.
• Depending on how the account is set up, you make decisions about how the money is invested — popular options include bonds, equities, mutual funds and other assets such as commodities.
• You can take qualified distributions from your IRA without paying taxes or penalties — see the section below on withdrawals to find out what a qualified distribution is.

How to open a Roth IRA

Roth IRA accounts are only offered by qualifying financial institutions. That generally includes federally insured credit unions and banks, so if you already hold accounts with these types of institutions, you might want to ask about Roth IRA options. 

The IRS keeps a list of approved nonbank trustees and custodians.¹ These are other financial institutions and brokers that can help you with a Roth IRA account.  Many individuals choose to work with registered broker-dealers that can help them set up and manage their account.

To open your Roth IRA, follow the steps below. 

Research Roth IRA account options

Providers of Roth IRAs aren't all the same. Each has its own fee schedule and processes. Different financial institutions and broker-dealers may also offer access to different investment options. For example, one might only offer Roth IRAs with mutual fund investments while another includes all types of investment options. 

When looking for a Roth IRA option, consider your budget, how much you want to save and your risk profile. If you're young, for example, you may want more options so you can be more aggressive with your investment strategy given the extended investing timeline. 

Contact the broker-dealer or bank

Once you decide on an option, reach out to the broker-dealer or bank to set things in motion. Ask them what you'll need to set up your account. Make an appointment or find out if you can open the account online. 

Some documents you may need to open a Roth IRA include:

• A government-issued ID with photo, such as a driver's license
• Your Social Security number, although you don't need your actual Social Security card
• Something to fund your account with, such as a check or the routing and account number for your checking or savings account
• Information about any beneficiaries you want to add to the account — you'll typically need each beneficiary's full name, and address.

Review the fine print and details

Before you sign anything or fund your account, review all the details — especially those associated with fees. Ensure you understand what services you're paying for and how much your Roth IRA costs overall. Fees may be subtracted from your account earnings, so if you don't pay attention to them, they can add up to a surprising amount over time.

Begin contributing to your account

Start funding your account. You can establish a Roth IRA anytime during the calendar tax year or through the tax deadline for that year. You must make all contributions for the year by the tax filing deadline for that year. Typically, the deadline is April 15 to April 18, depending on when weekend days fall. For the 2023 tax year, for example, the tax filing deadline is April 15, 2024. You can make 2024 contributions until the filing deadline of April 15, 2025.

Actively manage your investments

Continue contributing according to your retirement savings plan each year. You should also pay attention to your investments and actively manage them. Even if a broker-dealer handles the day-to-day for you, it can be in your best interest to actively review your funds. Consider using free financial tools like the Empower Personal DashboardTM to check on balances and performance on an ongoing basis.

Benefits of a Roth IRA

Many people wonder why you would contribute to a Roth IRA with after-tax dollars if you can get immediate tax benefits by contributing to a traditional IRA or another type of retirement account. However, Roth IRAs offer a number of benefits that might make it a good choice, depending on your financial needs.

Tax-free investment growth potential

You don't have to report the investment growth earned in your Roth IRA as taxable income when you file your taxes. You may need to pay taxes on any investment earnings when you make withdrawals, though.

Read more: What are Roth IRA taxes & how do they work?

Greater flexibility for withdrawals

Unlike other retirement accounts, Roth IRAs don't come with a requirement for taking distributions at a certain age. You never have to take any money out of your account if you don't need it. This allows you to keep money in reserve until you really need it or even hold wealth to pass on to heirs.

Tax savings for beneficiaries

If you have money in a Roth IRA when you pass away, your beneficiaries inherit it. They do have to take required minimum distributions from the account, which means they can't just hold on to it forever. However, if the Roth IRA was established five or more years prior to that point, your beneficiaries won't pay any taxes on those distributions. 

Understanding Roth IRA contribution and income limits

It's important to understand Roth IRA rules. Roth IRAs have the same contribution limits  as traditional IRAs.² In fact, the contribution limit for all IRAs is combined.

For the 2024 tax year, the maximum amount you can contribute to a Roth IRA is $7,000, or $8,000 if you are 50 or older.³ In 2023, the contribution limit was $6,5000, or $7,500 for those 50 or older.

The reason older adults are allowed to put more into their retirement funds is  because they have the option of making catch-up contributions. Catch-up contributions give people the ability to contribute more to their retirement account as they come closer to retirement age.

To understand how this might work, let's consider a hypothetical scenario. Betty has a traditional IRA and a Roth IRA. She is 45 years old. In 2023, she contributed $4,000 in pretax dollars into her traditional IRA. That leaves her with $2,500 in remaining potential contributions that she might decide to put into her Roth IRA.

Read more: Roth IRA 2023 and 2024 contribution limits

How income and filing status impact contribution limits

If all those rules weren't enough, your income and filing status can further limit how much you can contribute to a Roth IRA.⁴ Roth IRA contribution limits are phased out as incomes rise. The tables below provides some information about Roth IRA income limits for 2023 and 2024. 

Read more: Roth vs. traditional IRA: Which should choose?

Modified Adjusted Gross Income phase-out ranges for determining Roth IRA contribution eligibility:

Your eligibility to contribute is reduced as your income enters these ranges and is eliminated when your income exceeds these ranges.

In addition to eligible contributions to your Roth IRA, it is also possible to move other funds to your Roth IRA in what is known as a Roth Conversion.

Frequently asked questions about Roth IRAs

What happens if you exceed the IRS contribution limits?

If you make contributions above the allowed amounts, the IRS may charge you a 6% penalty on those excess contributions. If you don’t take action in subsequent years to correct the error by adjusting contributions accordingly, the IRS may continue to charge this penalty. The end result is that your tax bill is higher, and the amount you earn on your Roth IRA savings may be diminished by those penalties.  Consider taking precautions to first determine your eligibility before funding your contributions.

When and how much can you withdraw from a Roth IRA?

Now that you know how to get money into your Roth IRA and how much you can contribute, the next important consideration is when you can take your investment earnings out tax free. The quick answer is when you’re 59.5 years of age or older and you’ve had the IRA for at least 5 years. So, if you open an IRA at age 55, you’ll have to wait until you’re 60 to withdraw any earnings tax free. (Remember that you can withdraw your contributions at any time but doing so will reduce the investment growth potential of your account.)

What happens if you withdraw from a Roth IRA too early?

If you withdraw earnings from a Roth IRA early and it isn't a qualified distribution, you will pay regular income tax on the amount you withdraw and may end up paying an additional 10% penalty tax on the amount as well.

What's the difference between a Roth IRA and a traditional IRA?

Roth IRAs and traditional IRAs are easy to confuse since both are individual retirement accounts. As an individual, you can set up either of these accounts without an employer, which makes them potential options for the self-employed or those who want additional retirement savings outside of what their employers sponsor.

But there are many differences between these two types of IRAs. These differences may make one a better choice for you than another or, potentially, may make it advantageous to open both types of accounts. The table below highlights what you need to know about Roth IRAs vs. traditional IRAs.

What's the difference between a Roth IRA and a Roth 401(k)?

A Roth 401(k) is an option within an employer-sponsored 401(k) retirement plan. A Roth 401(k) is funded with after-tax dollars.

How do you invest in a Roth IRA?

Roth IRAs can be beneficial for many people who are looking to maximize their savings for retirement. In this section, we'll cover a number of tips to help you increase the benefits of investing in a Roth IRA.

Invest early

When you invest in a Roth IRA, your money can grow over time. The longer that money has to grow, the more you generally end up with when you retire.

To understand how big of a difference investing early can make, plug hypothetical numbers into any Roth IRA calculator you can find online. We've done so with two hypothetical situations below to illustrate the importance of investing early.

Starting at age 29 means a potential of more than $450,000 more upon retirement in this hypothetical scenario. The person who starts at age 29 ends up with almost 4.5 times the money they contribute, while the person who starts at age 40 only ends up with around 2.7 times what they put in.

Diversify your investments

You have probably heard that you need to diversify your portfolio to protect your investments. This simply means not putting all your eggs in one basket. For example, if you invest all your money in a single company that doesn’t do well, you will have little to show for your investments.

Depending on how your Roth IRA is set up, you may be able to diversify with asset allocation. For example, if you have options for stocks and bonds, you might decide on a 50/50 allocation. This would invest half of your funds in stocks and half in bonds. Another way to diversify your Roth IRA is by investing in funds, such as ETFs or mutual funds.

Maximize contributions when it makes sense

Making the most of your contributions can support your future savings. Here are a few tips.

• Check every year to see what the contribution limits are: Limits update annually (and sometimes stay the same). You may find you can contribute more this year than you have in the past.
• Make catch-up contributions if applicable: When you reach age 50, you can contribute an additional amount each year to your retirement accounts. Take advantage of this opportunity, especially if you've moved up in your career and have more disposable income than you used to.
• Contribute to more than one retirement account: You can contribute to multiple retirement accounts and may be able to save more each year. If you have an employer-sponsored 401(k) plan with matching, consider contributing enough to get your full employer match. That's part of your overall compensation package. Next, you may want to move on to your Roth IRA.
• Set retirement savings goals: Set goals for yourself, no matter how much you can contribute at the moment. If you can only spare $100 a month, that's still $1,200 a year. Write the goal somewhere you can see it, and mark it off when you reach it. You can input your savings goals into Empower Personal DashboardTM, free financial planning tools that give you a clear picture of your current finances and help you predict potential outcomes. Also, consider trying to increase your savings goal by a certain percentage every year.

The bottom line

A Roth IRA is just one tool for saving for retirement. It's never too early or too late to consider your options and start planning for your golden years.