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What Is a Roth IRA and Who Can Use One?
Summary
You contribute after-tax money to a Roth IRA. Qualified withdrawals in retirement are tax-free. Income limits apply; not everyone can contribute the full amount.
A Roth IRA is a retirement account you open on your own (not through an employer). You put in money you’ve already paid tax on. It grows in the account, and when you take it out in retirement, you generally don’t pay tax on the withdrawals. That’s the main appeal: tax-free growth and tax-free income later.
There’s an annual contribution limit, and if your income is above a certain level, the amount you can contribute is reduced or phased out. The limits change each year, so it’s worth checking the current numbers.
When a Roth IRA fits
A Roth IRA is especially attractive when you’re in a lower tax bracket now and expect to be in the same or higher one in retirement. It’s also useful if you want a pool of tax-free money in retirement to draw on without pushing your taxable income up. You can use our IRA Calculator to see how contributions might grow over time.
Definitions
- Roth IRA
- An individual retirement account where contributions are made with after-tax money and qualified withdrawals in retirement are tax-free.
- Income limits
- The IRS limits who can contribute to a Roth IRA based on modified adjusted gross income. Above a certain level, the allowed contribution is reduced or eliminated.
FAQ
Who can open a Roth IRA?
Anyone with earned income can open a Roth IRA, but the amount you can contribute may be reduced or phased out if your income is above the IRS limit for your filing status. Check the current year’s limits.
What’s the difference between a Roth IRA and a 401(k)?
A 401(k) is through an employer; a Roth IRA is an account you open yourself. Roth IRA contributions are after-tax and grow tax-free; traditional 401(k) contributions are often pre-tax and are taxed when you withdraw. Many people have both.