A Roth Individual Retirement Account (Roth IRA) is a tax-advantaged savings vehicle designed to help you prepare for retirement by leveraging the benefits of after-tax contributions and tax-free withdrawals. Unlike traditional IRAs, where contributions may be tax-deductible but withdrawals are taxed, a Roth IRA operates on a different principle: contributions are made with income that has already been taxed, allowing both the initial investment and its subsequent earnings to be withdrawn tax-free in retirement, provided certain conditions are met. This structure makes the Roth IRA particularly appealing if you anticipate being in a higher tax bracket during your retirement years compared to your current earning phase, as it enables you to lock in today’s potentially lower tax rates and avoid taxation on future growth. For additional questions or personalized guidance, schedule a consultation with us.
Contributions
Eligibility
You may contribute to a Roth IRA, regardless of age, if you have taxable compensation (earned income), such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. Passive or unearned income—including interest, dividends, capital gains, unemployment benefits, Social Security payments, etc.—does not qualify as earned income for a Roth contribution. If you lack earned income but file a joint tax return with a spouse who has earned income, you may be eligible to contribute to a spousal Roth IRA based on the working spouse’s income.
Contributions (excluding rollovers or conversions) must be made in cash, meaning monetary funds—not property such as stocks, real estate, or other assets.
Limits & Phaseouts
The amount you can contribute to a Roth IRA is capped at the lesser of two figures: your taxable compensation (earned income) for the year or the annual contribution limit established by the IRS. The IRS does impose income phaseout ranges that gradually reduce your contribution limit as your MAGI increases, eventually phasing out eligibility entirely for higher earners. To calculate your allowable contribution, you must compare your MAGI to the applicable phaseout range for your filing status shown below:
↳ For Tax Year 2025
| Filing Status | If your MAGI is... | Then the allowed contribution is... |
|---|---|---|
| Single | ≤ $150,000 | $7,000 (+ $1,000 if above age 50) |
| Between $150,000 & $165,000 | Reduced | |
| ≥ $165,000 | Not eligible ($0) | |
| Married filing jointing | ≤ $236,000 | $7,000 (+ $1,000 if above age 50) |
| Between $236,000 & $246,000 | Reduced | |
| ≥ $246,000 | Not eligible ($0) |
-
The additional $1,000 allowed for those age 50 and above is known as a “catch-up” contribution, designed to help older savers bolster their retirement funds as they near retirement age.
-
Important Note: these figures reflect the total contribution limit across all your Traditional and Roth IRAs combined for a given tax year, excluding rollovers.
↳ For Tax Year 2024
| Filing Status | If your MAGI is... | Then the allowed contribution is... |
|---|---|---|
| Single | ≤ $146,000 | $7,000 (+ $1,000 if above age 50) |
| Between $146,000 & $161,000 | Reduced | |
| ≥ $161,000 | Not eligible ($0) | |
| Married filing jointing | ≤ $230,000 | $7,000 (+ $1,000 if above age 50) |
| Between $230,000 & $240,000 | Reduced | |
| ≥ $240,000 | Not eligible ($0) |
-
The additional $1,000 allowed for those age 50 and above is known as a “catch-up” contribution, designed to help older savers bolster their retirement funds as they near retirement age.
-
Important Note: these figures reflect the total contribution limit across all your Traditional and Roth IRAs combined for a given tax year, excluding rollovers.
What is my MAGI?
For many people, their Adjusted Gross Income (AGI) will be the same or very close to their Modified Adjusted Gross Income (MAGI). However, MAGI is a critical figure for determining your eligibility to contribute to a Roth IRA, as it affects the income phaseout ranges set by the IRS. Below is a quick overview of how to calculate your MAGI for Roth IRA contribution purposes.
- Calculate Your Gross Income
- Your gross income includes all income you earn in a year from all sources, such as wages, salaries, commissions, tips, bonuses, net self-employment income, capital gains, interest, dividends, retirement distributions, unemployment benefits, and other income.
- Calculate Your Adjusted Gross Income (AGI)
- Your AGI is your gross income minus certain above-the-line deductions, including:
- Contributions to certain retirement accounts (such as a traditional IRA)
- Contributions to HSA
- Half of any self-employment tax paid
- Self-employed health insurance premiums
- Student loan interest
- Educator expenses
- And other applicable adjustments (see IRS Publication 17 for a full list)
- Your AGI is your gross income minus certain above-the-line deductions, including:
- Add back certain deductions
- student loan interest deduction
- foreign earned income and housing exclusions
- foreign housing deduction,
- excluded savings bond interest
- excluded employer adoption benefits
- Deductions for traditional IRA contributions (if deducted)
This should provide you with a rough estimate of your MAGI.
Contribution Deadline
Contributions to a Roth IRA can be made at any time during the calendar year for which the contribution applies or by the federal income tax filing deadline for that year, not including any extensions. This deadline is typically April 15. For example, for the 2024 tax year, contributions can be made from January 1, 2024, through April 15, 2025.
Rollovers Into: Roth IRA
A rollover is a tax-free distribution of funds from one retirement plan to another eligible retirement plan, with the contribution to the second plan referred to as a “rollover contribution.” There are several compelling reasons to consider rolling funds from another retirement plan into a Roth IRA. These include simplifying account management, accessing a broader range of investment options, potentially benefiting from lower fees and leveraging Roth IRA’s tax-free growth and withdrawal benefits.
↳ Rollover Chart: Which Retirement Accounts Are Allowed To Be Rolled Into A Roth IRA
| Type of Account | Allowed? |
|---|---|
| Roth IRA | Yes ₍₂₎ |
| Traditional IRA | Yes ₍₃₎ |
| SIMPLE IRA | Yes, after two years ₍₂₎₍₃₎ |
| SEP IRA | Yes ₍₃₎ |
| Governmental 457(b) Plan | Yes ₍₃₎ |
| Qualified Plan ₍₁₎ (pre-tax) | Yes ₍₃₎ |
| 403(b) Plan (pre-tax) | Yes ₍₃₎ |
| Designated Roth Account (401(k), 403(b), or 457(b)) | Yes |
Additional Info: (1)(2)(3)
(1) – Qualified plans include profit-sharing, 401(k), money purchase, and defined benefit plans. (2) – Only one rollover in any 12-month period. (3) – Must include in income
Additional Info: (1)(2)(3)
↳ Rollover Chart: Rollover a Pre-tax Account (Qualified Plans, IRA, etc.) Into a Roth IRA
You might consider rolling over funds from a pre-tax retirement account into a Roth IRA during a year when your income is lower. The rollover amount will be included in your taxable income for that year, but this strategy allows you to “lock in” a lower tax rate during low-income periods. Once in the Roth IRA, the funds can grow tax-free, Required Minimum Distributions (RMDs) are no longer required, and qualified distributions will be tax-free, provided IRS requirements—such as reaching age 59½ and satisfying the 5-year holding period—are met.
↳ More on Rollovers: Individuals Can Perform a Rollover in The Following Ways
- Direct rollover – An account holder must request instructions from their plan administrator. Typically, a check is made payable to the new 401(k) or IRA custodian (e.g., “Fidelity Investments FBO [Your Name]”) and sent directly to the new plan. No taxes are withheld from the transfer amount because the funds do not pass through the individual’s hands.
- Trustee-to-trustee transfer – The trustee or custodian of one plan transfers the rollover amount directly to the trustee or custodian of another plan. This is common for IRA-to-IRA transfers. No taxes are withheld, and the individual does not take possession of the funds.
- 60-day rollover – If a distribution from an IRA or retirement plan is paid directly to you (e.g., a check in your name), you can deposit all or a portion of it into an eligible retirement plan within 60 days. For distributions from a retirement plan like a 401(k), taxes (typically 20%) are withheld, so you’ll need to use other funds to roll over the full pre-tax amount. For IRA distributions, taxes are not automatically withheld unless requested.
- Note: Only one IRA-to-IRA 60-day rollover is allowed per 12-month period (this limit does not apply to direct rollovers, trustee-to-trustee transfers, or rollovers involving employer plans).
Investments
Type of Investments
You typically open a Roth IRA through a brokerage firm or bank, which determines the range of investment options available within your account. For guidance on selecting a brokerage, refer to our recommendations for preferred brokerages. Most brokerage firms and banks offer the following common investment options for Roth IRAs:
- Exchange traded funds (ETFs)
- Money market funds
- Mutual funds
- Index funds
- Individual bonds
- Individual stocks
Investment Options In Self-Directed Roth IRAs
Self-directed Roth IRAs broaden your investment options beyond traditional assets, allowing access to alternatives like real estate, precious metals (e.g., gold), private business partnerships, cryptocurrency, and other non-standard investments. These accounts require a specialized custodian to ensure IRS compliance, given the heightened risks, higher fees, and intricate tax and regulatory requirements. Managing them demands greater investor diligence and expertise to avoid pitfalls—such as prohibited transactions—that could jeopardize the IRA’s tax-advantaged status.
Prohibited Investments
Federal law prohibits Roth IRA funds from being invested in certain assets, including life insurance contracts, collectibles (such as art, antiques, coins beyond IRS limits, or gems), and stock in subchapter S corporations, among other items. If you invest Roth IRA funds in any prohibited investment, the IRS treats the amount invested as a distribution in the year it occurs. This could result in you owing income tax on the distribution, plus a 10% early withdrawal penalty if you are under age 59½.
Prohibited Transactions (self-dealing)
Prohibited transactions are certain improper dealings between a Roth IRA and disqualified persons, such as yourself, your beneficiaries, or other individuals or entities defined by IRS rules. These transactions do not restrict the types of investments you can hold within the Roth IRA (e.g., stocks, real estate), but they prohibit specific interactions or transactions with disqualified persons. If a prohibited transaction occurs, the IRS treats the entire Roth IRA as distributed (or deemed distributed) as of January 1 of the year in which the transaction took place. This can result in you owing income tax on the distributed amount, and a 10% early withdrawal penalty if you are under age 59½.
Who is a disqualified person?
- Family members, such as a spouse, ancestors (e.g., parents, grandparents), lineal descendants (e.g., children, grandchildren), and certain in-laws
- Fiduciaries of the Roth IRA (e.g., custodians or trustees)
- Individuals with discretionary control over your Roth IRA
- Individuals who provide investment advice for a fee or other compensation
- Individuals or entities responsible for administering the Roth IRA
- Entities (e.g., corporations, partnerships) controlled by any of the above disqualified persons
Examples Of Prohibited Transactions
It is critical to understand prohibited transactions, particularly when managing a self-directed Roth IRA, due to the broader range of investment options and potential risks. If you have any concerns, seek advice from a legal or tax professional. Below are a few examples to illustrate prohibited transactions:
(1) Selling property to your Roth IRA – It is a prohibited transaction if you or a disqualified person sell property that you own to your Roth IRA (e.g., purchasing your mother’s house).
(2) Buying property for personal use – It is a prohibited transaction if you buy property within your Roth IRA that you or a disqualified person use for personal benefit (e.g., purchasing a condo to rent but also vacationing there yourself).
(3) Making certain loans – It is a prohibited transaction if you make a loan from your Roth IRA to yourself or a disqualified person (e.g., lending money to your business or your child).
(4) Using the Roth IRA as loan collateral – It is a prohibited transaction if you use your Roth IRA as collateral for a loan (e.g., pledging IRA assets to secure a personal loan).
Distributions
Qualified Distribution
A qualified distribution from your Roth IRA is a withdrawal where the earnings—money earned from your investments—come out free of taxes and penalties. But to get this tax-free and penalty-free treatment on your earnings, two important conditions must be met.
- Five-Year Rule
- The Roth IRA must have been open for at least five tax years, counting from the first year any contribution was made to any Roth IRA.
- Qualifying Event (the withdrawal must be for one of these reasons)
- You’re age 59½ or older,
- You’re disabled,
- It’s paid to a beneficiary after your death,
- It’s for a qualified first-time home purchase (up to a $10,000 lifetime limit).
Contributions (not earnings) can be withdrawn anytime tax- and penalty-free, but only qualified distributions extend this benefit to earnings.
Ordering Rules
There is a set order for distributions from your Roth IRA, which determines when and whether taxes and/or a 10% early withdrawal penalty apply. Distributions are taken in the following sequence until each “bucket” is exhausted: (1) contributed principal, (2) converted principal, and then (3) earnings. Additionally, you must be aware of the five-year aging rule, which varies depending on the type of contribution or conversion.
#1 ─ Contributed Principle
Contributed principal is withdrawn first. This refers to your after-tax contributions to the Roth IRA. Since these funds were already taxed, you can typically withdraw contributed principal at any time, regardless of your age or how long the Roth IRA has been held, without owing taxes or early withdrawal penalties.
#2 ─ Converted Principal
Converted principal is withdrawn second. This consists of funds you’ve converted from a traditional IRA or other eligible retirement account to a Roth IRA, on which you’ve already paid income tax. These amounts are tax-free upon withdrawal but penalty-free only after (whichever occurs first):
(a) a five-year holding period
OR
(b) reaching age 59½
You may also be able to avoid the 10% early withdrawal penalty if you qualify for an exception (listed in the below tab). Each Roth IRA conversion has its own five-year holding period, so if you make multiple conversions over several years, you’ll need to track each one to avoid unexpected taxes or penalties.
Exceptions to the 10% penalty rule
- Distributions up to $5,000 per child for qualified birth or adoption expenses
- The account holder’s death or permanent disability
- Qualified higher education expenses
- Qualified first-time homebuyer distributions, up to a $10,000 lifetime limit
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI) for the tax year
- Health insurance premiums paid while unemployed
- and other certain other IRS-specified exceptions (e.g., IRS levy, reservist distributions).
#3 ─ Earnings
Earnings are withdrawn last. These are the untaxed investment returns generated by your contributed or converted principal. To withdraw earnings tax-free and penalty-free, you must generally meet two requirements:
(a) you must be at least 59½ years old
AND
(b) your Roth IRA must have been open for at least five years, with the five-year clock starting on January 1 of the tax year in which you made your first contribution to any Roth IRA
Below are the scenarios you may encounter when withdrawing earnings:
| Age | Roth Account Age | Earning Taxable? | 10% Penalty? |
|---|---|---|---|
| Under 59½ | <5 years | Yes | Yes (unless exception) |
| ≥5 years | Yes (unless death, disability or qualified first time homebuyer) | Yes (unless exception) | |
| Over 59½ | <5 years | Yes | No |
| ≥5 years | No | No |
Exceptions to the 10% penalty rule
You may avoid the 10% early withdrawal penalty on distributions if one of the following applies:
- Distributions up to $5,000 per child for qualified birth or adoption expenses
- The account holder’s death or permanent disability
- Qualified higher education expenses
- Qualified first-time homebuyer distributions, up to a $10,000 lifetime limit
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income (AGI) for the tax year
- Health insurance premiums paid while unemployed
- and other certain other IRS-specified exceptions (e.g., IRS levy, reservist distributions).
Required Minimum Distributions (RMDs)
Rollovers Out: From Roth IRA
A rollover is a tax-free distribution of funds from one retirement plan to another eligible retirement plan, with the contribution to the second plan referred to as a “rollover contribution.” There may be compelling reasons to consider rolling funds from your Roth IRA into another Roth IRA (since that is the only rollover allowed). These include simplifying account management, accessing a broader range of investment options and potentially benefiting from lower fees from another Roth IRA custodian.
↳ Rollover Chart: Which Retirement Accounts Are Allowed To Accept A Roth IRA Rollover
| Type of Account | Allowed? |
|---|---|
| Roth IRA | Yes ₍₂₎ |
| Traditional IRA | No |
| SIMPLE IRA | No |
| SEP IRA | No |
| Governmental 457(b) Plan | No |
| Qualified Plan ₍₁₎ (pre-tax) | No |
| 403(b) Plan (pre-tax) | No |
| Designated Roth Account (401(k), 403(b), or 457(b)) | No |
Additional Info: (1)(2)
(1) – Qualified plans include profit-sharing, 401(k), money purchase, and defined benefit plans. (2) – Only one rollover in any 12-month period.
Additional Info: (1)(2)
↳More on Rollovers:Individuals Can Perform a Rollover in The Following Ways
- Direct rollover – An account holder must request instructions from their plan administrator. Typically, a check is made payable to the new 401(k) or IRA custodian (e.g., “Fidelity Investments FBO [Your Name]”) and sent directly to the new plan. No taxes are withheld from the transfer amount because the funds do not pass through the individual’s hands.
- Trustee-to-trustee transfer – The trustee or custodian of one plan transfers the rollover amount directly to the trustee or custodian of another plan. This is common for IRA-to-IRA transfers. No taxes are withheld, and the individual does not take possession of the funds.
- 60-day rollover – If a distribution from an IRA or retirement plan is paid directly to you (e.g., a check in your name), you can deposit all or a portion of it into an eligible retirement plan within 60 days. For distributions from a retirement plan like a 401(k), taxes (typically 20%) are withheld, so you’ll need to use other funds to roll over the full pre-tax amount. For IRA distributions, taxes are not automatically withheld unless requested.
- Note: Only one IRA-to-IRA 60-day rollover is allowed per 12-month period (this limit does not apply to direct rollovers, trustee-to-trustee transfers, or rollovers involving employer plans).
Inheritance and Death
When you pass away, your Roth IRA assets can be passed to designated beneficiaries, often with significant tax benefits. Inherited Roth IRAs allow beneficiaries to receive tax-free distributions if the account has been open for at least five years. Withdrawal rules vary based on the beneficiary’s relationship to the deceased and the timing of the inheritance. Spouses may treat the Roth IRA as their own, while non-spouse beneficiaries generally must adhere to the 10-year rule, requiring full distribution within 10 years of the owner’s death. Careful planning and accurate beneficiary designations are crucial to ensure the Roth IRA is transferred efficiently and complies with current IRS regulations. Please refer to the inherited IRA page for more information.
FAQs
What are the benefits / drawbacks of a Roth IRA?
Benefits
- Tax-Free Growth: Earnings within a Roth IRA, such as dividends, interest, and capital gains, grow tax-free. Qualified withdrawals in retirement are also tax-free, provided you are at least 59½ years old and the account has been open for five years.
- Tax-Free Investment Activity: You can receive dividends, interest, and rebalance or adjust investments within the Roth IRA without incurring tax liability, enhancing flexibility for portfolio management.
- Relatively Easy to Set Up
- No Required Minimum Distributions (RMDs)
- Penalty- and Tax-Free Withdrawal of Contributions: You can withdraw your principal contributions (after-tax dollars) at any time, regardless of your age or how long the account has been held, without owing taxes or penalties.
Drawbacks
- No Upfront Tax Deduction: Contributions to a Roth IRA are made with after-tax dollars, so you don’t receive a tax deduction at the time of contribution, unlike with a Traditional IRA.
- Relatively Low Contribution Limits
- Income Limits on Contributions: Roth IRA contributions are subject to MAGI-based phaseout ranges, which may prevent high earners from contributing directly.
Who can contribute to a Roth IRA?
Anyone who has earned income can contribute to a Roth IRA, regardless of age. However, there is an income limit based on your Modified Adjusted Gross Income (MAGI) and filing status, which means not everyone with earned income will be eligible to contribute. The IRS sets phaseout ranges that reduce or eliminate contribution eligibility for higher earners, so you’ll need to check your MAGI against these limits to determine your eligibility.
Can my non-working spouse also contribute to a Roth IRA?
Yes, your non-working spouse can contribute to their own Roth IRA, up to the annual contribution limit. However, certain conditions must be met:
- You and your spouse must file a joint tax return.
- The total contributions for both spouses cannot exceed the working spouse’s earned income for the year.
- Contributions are subject to income phaseout limits based on your combined Modified Adjusted Gross Income (MAGI) and Married Filing Jointly filing status.
What happens if I contribute too much or am no longer eligible to contribute to a Roth IRA due to my income?
Mistakes can happen—you may contribute more than allowed or discover your income exceeds the Roth IRA phaseout limits, making you ineligible. It’s critical to address excess contributions promptly, as they are subject to a 6% excise tax each year they remain in the IRA until corrected. Below are options for addressing excess contributions:
(1) Remove excess before tax filing deadline – To avoid the 6% excise tax, you can withdraw your excess contributions, along with any associated earnings (Net Income Attributable, or NIA), by the federal tax filing deadline for that year—typically April 15. The IRS will treat the contribution as if it never occurred, but the NIA will be taxed as ordinary income. The NIA is calculated as:
- Net Income = Excess to be removed x ((Adjusted Closing Balance – Adjusted Opening Balance) / Adjusted Opening Balance)
If you identify the error after filing your taxes, you can still withdraw the excess and file an amended tax return by the extended deadline (typically October 15 for the prior year, assuming no further extensions). The same rules apply: no 6% excise tax, but the NIA is taxed as ordinary income.
(2) Carry over the excess amount – You can elect to leave the excess contribution in the IRA and apply it toward the next year’s contribution limit, but you must pay the 6% excise tax for the year the excess remains. The excess will be counted toward the following year’s contribution limit, reducing your allowable contribution for that year. Be aware that you’ll owe the 6% excise tax each year the excess remains in the IRA until it is fully absorbed by future contribution limits.
(3) Withdraw the Excess Amount After the Deadline – If you cannot withdraw the excess by the tax filing deadline or extended deadline, you can still remove it at any time. However, you’ll be subject to the 6% excise tax for each year the excess remains in the account. Any associated earnings (NIA) will be taxed as ordinary income.
When must I withdraw my Roth IRA funds?
There are no required minimum distributions (RMDs) for Roth IRAs during the account holder’s lifetime. You can keep your funds in the account to grow tax-free for as long as you wish or pass them on to beneficiaries. However, note that Roth IRA beneficiaries may be subject to RMDs or other distribution rules after your death, depending on IRS regulations and the beneficiary’s relationship to you.