Roth IRA Rules & How to Open One

A Roth IRA is an individual retirement account that you contribute to with after-tax dollars. While you don’t get a tax break up front, your contributions and investment earnings grow tax-free.

What is a Roth IRA account?

A Roth IRA is an individual retirement account that takes after-tax dollars, then provides tax-free growth and withdrawals in retirement. Once you’re 59 1/2 and the account has been open for at least five years, you can withdraw from your Roth IRA without paying federal taxes.

How does a Roth IRA work?

A Roth IRA works by taking contributions of after-tax dollars from a qualifying source of earned income. Money contributed to your Roth IRA could come from a job, but could also be a rollover from a Roth 401(k) plan, conversion from an existing Traditional ira or 401(k) plan, a spousal contribution, or other transfer. (More on these options below.)

You’ll need to choose a broker where you’ll open your Roth IRA and select where you want to invest the money. Over a long time horizon, those investments could earn a return.

Are Roth IRAs insured?

This depends on where your Roth IRA is held. Roth IRAs that aren’t held at a bank do not have FDIC insurance. Instead, assets in your brokerage account are protected by sipc insurance policy which, among other protections, offers up to $500,000 in protection for your Roth IRA if your broker fails financially and assets are missing.

If your retirement account is with a bank that offers FDIC insurance, it is insured, but under a different category from normal deposit accounts. What this means for retirement accounts is that you still get $250,000 in insurance protection, but it’s a combined limit across any traditional and Roth IRAs held at that bank.

Roth IRA eligibility rules

Anyone with earned income can open a Roth IRA, but there are rules around contributing to a Roth IRA. The amount and ability to contribute depends on your filing status and modified adjusted gross income, or magi At higher income levels, that contribution amount is phased out and, eventually, eliminated.

For 2024, the contribution limit is to $7,000 if your MAGI is below $146,000 (single filers) or below $230,000 (married filing jointly). The max contribution amount goes up $1,000 to $8,000 if you’re 50 or older.

At incomes above that, your contribution limit becomes smaller, until it is eliminated completely at $161,000 for single filers in 2024 and $240,000 for those married filing jointly in 2024.

What’s a spousal Roth IRA?

A Roth IRA is considered a spousal Roth IRA when a working spouse contributes to the account on behalf of their partner who earns little or no income. It’s an exception to the rule where only those with earned income can contribute to their IRA.

Roth IRA vs. traditional IRA: What’s the difference?

The main difference between a Roth IRA and traditional IRA is how they’re taxed. Roth IRAs give you tax-free withdrawals in retirement, while traditional IRAs give you a tax break when you contribute.

You can have both a Roth IRA and a traditional IRA, and your contribution strategy can depend on your needs and retirement plans. If you want an immediate tax break, consider a traditional IRA. If you like the idea of tax-free income in retirement, Roth IRAs might be a better option for you.

How to open a Roth IRA in 4 steps

1. Decide what type of investor you are.

If you’re a “do-it-yourself” investor, choose a brokerage.

You can open a Roth IRA at an online broker and then choose your own investments. This may be simpler than you think — you can build a diversified portfolio with just three or four mutual funds that are in different asset classes. The best brokers offer a large list of low-cost investments to choose from, including index mutual funds and exchange-traded funds. More benefits to look for include extensive retirement planning tools, robust customer service and reasonable account minimums and fees. When comparing brokers, look at trade commissions and the investment fees of their offered funds (also called expense ratios).

If you’re a “manage it for me” or hands-off investor, choose a robo-advisor.

If you’d rather have someone pick an investment portfolio for you and manage your investments over time, you can open your Roth IRA at a robo-advisor. Robo-advisors are online services that build and maintain a diversified portfolio for you. Generally, robo-advisors hire investment pros to develop a handful of portfolios aimed at different types of investors. Some robos offer portfolios that vary based on amount of risk, with “aggressive” ones for people who want a high percentage of their portfolio in stocks and “conservative” for people who seek a less volatile investment account.

2. Choose how much you want to invest.

How much do you need to open a Roth IRA? While there generally isn’t a fee for opening a Roth IRA, there may be other costs and requirements depending on your provider and selected investments. Some brokers and robo-advisors — but not all — may require a minimum amount to open an account with them.

Think about your budget, your time horizon, and investing goals, and consider investing only money you won’t need in the next five years. That way, you have time to ride out any highs and lows of the market.

3. Gather your paperwork.

So, you’ve learned all about how Roth IRAs work and even settled on a provider. Now what? It’s time to gather any paperwork or documentation you may need to set up your Roth IRA account.

Exact requirements may vary based on the financial institution, but generally, you may want to have the following information available during the sign-up process:

• Access to a working email and phone.
• An ID (such as a state driver’s license or a passport) to confirm your identity, address, and date of birth.
• A Social Security number or tax identification number.
• Proof of employment, if applicable.
• The name, addresses and dates of birth of any beneficiaries you’d like to add to the account.
• The name and addresses of any trusted contacts in case your account’s security is breached.
• The routing and/or account numbers for the bank account you’ll use to fund your Roth IRA.

4. Pick your investments.

The last step in learning how to open a Roth IRA is to decide how to invest the money in the account. That’s because a Roth IRA is just the account type, not an automatic investment. To build wealth over time, that money needs to be invested.

If you’re a hands-off investor and you’ve opted to open your Roth IRA at a robo-advisor, that service will choose a diversified investment portfolio for you.

If you’re a DIY investor, you can get that diversification on your own by building a portfolio out of index mutual funds and ETFs. To do that, you’ll want to decide how much of your money to put toward riskier investments, such as stock funds, and how much you want to keep relatively safe in, for example, bond funds and cash.

And if you get stuck? Use a model. Check out the portfolios used by robo-advisors (often displayed on their websites), then mimic them. Be sure to rebalance the investments as they shift out of the original allocation you decided on, because you won’t have robo-advisors to do it for you.

What if you’re not eligible?

If your income means you don’t qualify to contribute to a Roth IRA, it still might be possible to receive the tax benefits of a Roth IRA.

Two options to explore would be a Roth IRA conversion and a backdoor Roth. To do a roth ira conversion, funds are transferred from a traditional IRA or a qualified employer-sponsored retirement plan (such as a 401(k) plan) into a Roth IRA. If moving money that previously received a tax deduction, then the Roth conversion would be taxable, though you’d still have the benefit of taking out any investment gains in retirement tax-free.

A backdoor Roth is a form of a Roth conversion but specifically relates to high-earners who, because they can’t contribute to a Roth IRA, make nondeductible contributions to a traditional IRA first and then convert it into a Roth IRA. A correctly executed backdoor Roth typically does not generate taxes, as no deduction was received for that initial contribution, but there are some caveats, including whether the investor has an IRA balance or if any gains have occurred during the transfer.

What are the Roth IRA withdrawal rules?

Once you’ve opened your account, here are a few withdrawal and distribution rules you must follow:

Roth IRA withdrawal rules

• You can withdraw your original contributions whenever you want, without owing any penalties or taxes, no matter how long your account has been open. That’s because the money you put in is money you’ve already paid income tax on.
• When you withdraw money from a Roth IRA, the IRS always assumes your original contributions come out first.
• People at least 59 ½ years old, and who have held their accounts for at least five years, can take distributions, including earnings, without paying federal taxes.^[1]

Roth IRA withdrawal penalty

Qualified withdrawals of investment earnings in the account come out tax-free. The key here is “qualified.” If you withdraw earnings before 59 ½, or otherwise don’t meet the rules for a qualified withdrawal, the IRS may want a piece of those returns, in the form of taxes and a possible penalty.

Examples of qualified withdrawals before age 59 1/2 include a first home purchase, qualified education expenses, health insurance premiums while unemployed, disability-related expenses, having a baby or adopting. Be sure you understand all the rules of these exceptions.

Frequently Asked Questions (FAQ) About Roth IRAs