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What is a Roth IRA, and how does it work?

Documents about Individual retirement account IRA on a desk.
A Roth IRA is a type of individual retirement account that allows for tax-advantaged, long-term savings for your future. Getty Images/iStockphoto

Preparing for a successful retirement can be a decades-long effort - and it's not always an easy one, either. In a recent survey by New York Life, just 31% of U.S. adults reported feeling confident that their retirement savings will last the rest of their life. 

Saving enough money for retirement often requires a multi-faceted approach: managing your spending, creating a savings strategy, making wise investment choices and choosing a retirement account that's right for you. One such account is the Roth IRA, which offers tax-advantaged savings and flexible investment opportunities.

Whether you're considering opening a Roth IRA or if you're already using one, it never hurts to understand how it can affect your overall retirement plans. Here's what you need to know.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account (also known as an individual retirement arrangement) that allows for tax-advantaged, long-term savings for your future. These accounts are offered by a variety of financial institutions - including banks, credit unions and brokerages - and are funded with your after-tax dollars. 

You have a number of investment options with the funds held in a Roth IRA account, including stocks, bonds, exchange-traded funds (ETFs), mutual funds and target-date retirement funds. In this type of account, the money can continue to grow until you reach retirement age, when it can be withdrawn and used as a source of income. 

How much should I contribute to my Roth IRA?

Roth IRAs are available to most employed individuals. You can generally contribute to a Roth IRA as long as you have earned income for the year and don't exceed certain IRS income limits. For IRA purposes, earned income can include wages, tips, salaries, bonuses, commissions, self-employed income and more.

For 2022, Roth IRA contribution limits are the lesser of $6,000 per year or their taxable income for the year. If you're age 50 or older, you are also allowed a catch-up contribution of $1,000, bringing your total annual IRA contribution maximum for 2022 to $7,000. 

If your taxable income for the year is less than the standard Roth IRA contribution limit, your maximum contribution is the same as your income. So, if you only make $4,200 this year, you'll only be able to contribute up to $4,200 to your Roth IRA, even though the limit is $6,000.

What is the income limit for a Roth IRA?

The income limits on Roth IRAs are based on your modified annual gross income (AGI). If your earnings are above the maximum limit, you won't be able to make any contributions without incurring a penalty. Additionally, the amount you can contribute without a penalty decreases if your income passes the minimum phase-out limit. 


Federal income tax filing status Contributions are reduced starting at a modified adjusted gross income (AGI) of... Contributions end at a modified adjusted gross (AGI) income of...
Married filing jointly or qualifying widow(er) $204,000 $214,000 or more
Single, head of household, or married filing separately (if you didn't live with your spouse at all in 2022) $129,000 $144,000 or more
Married filing separately (if you lived with your spouse at any point in 2022) $0 $10,000 or more

When your income is in the phase-out range, you can use the IRS's worksheet to calculate your reduced contribution amount. If you land below the phase-out threshold, you'll be able to contribute the maximum amount for that year – as long as you've earned at least an equal amount of taxable income. 

Roth IRA contributions are not tax-deductible. This means that they are made with after-tax dollars and cannot reduce your taxable income for the year.

How does a Roth IRA work?

The money held in a Roth IRA can be invested in many different ways, ideally growing its value in preparation for retirement. Those funds will grow tax-free, meaning you aren't responsible for claiming that growth or paying taxes on it each year. Because contributions are made with after-tax dollars, the distributions - or withdrawals in retirement - also aren't taxable. 

You can withdraw your Roth IRA contributions for any reason and at any time without penalty. Once you reach age 59 ½ and have had the account open for at least five years, you can also begin withdrawing your earnings without penalty. 

If you withdraw funds from your Roth IRA before hitting these thresholds, your distribution may be subject to income tax as well as a penalty tax of 10%. However, there are some exceptions to this penalty. Make sure to check the IRS website to see if you qualify.

Unlike traditional IRAs, which have required minimum distributions (RMDs) starting at age 72, you're not required to withdraw funds from your Roth IRA at a certain time unless you want to. Those funds can stay and grow in your account for the rest of your life, and can even be passed to your beneficiaries after your death.

What are the benefits of a Roth IRA?

There are many benefits to using a Roth IRA for retirement savings.

  • No taxes on growth or distributions: Since contributions are made with after-tax dollars, they grow tax-free over the years and provide tax-free income in retirement.
  • Withdraw contributions any time: Roth IRA owners can pull their contributions out whenever they desire without having to pay penalties or taxes on that money.

Roth IRAs are usually ideal for future retirees who expect to be in a higher income tax bracket when they retire. They will pay taxes on those dollars now, when the money is earned; come retirement, the money can be withdrawn without counting as ordinary income.

If you qualify, a Roth IRA can be an important part of your retirement savings strategy, offering tax-free growth over the years and tax-free withdrawals in retirement. They can even be used in combination with other types of retirement savings accounts to amplify your efforts.

Roth IRA withdrawal rules and penalties

You can withdraw your original Roth IRA contributions for any reason and at any time without penalty or tax. Your earnings from those contributions may be subject to income tax or penalties in certain situations.

Regular contributions and qualified distributions aren't taxable. 

Roth IRA distributions that return your regular contributions (also called withdrawals) are tax free and aren't subject to the 10% penalty. There are three types of Roth IRA distributions, or withdrawals:

  1. Return of regular contributions (or withdrawal of contributions)

  2. Qualified distributions, also known as a qualified withdrawal

  3. Non-qualified distributions

Roth IRA vs. Traditional IRA: What's the difference?

As long as you meet the income limit to contribute, there's nothing keeping you from having and contributing to multiple IRAs. A traditional IRA follows many of the same rules as a Roth IRA, but with a few key differences:

  • Traditional IRA contributions may be tax-deductible in the tax year they're made.
  • Distributions from a traditional IRA are subject to federal income tax in the year they're withdrawn.
  • Distributions from traditional IRAs are required "by April 1 of the year following the year in which you reach age 72," according to the IRS.
  • Traditional IRA eligibility phases out based on income, tax filing status and whether the individual is also covered by a workplace retirement plan.

As with a Roth IRA, you can only contribute up to $6,000 into a traditional IRA each year ($7,000 if over 50). It's also important to note that this limit applies to all of your IRAs. If you have more than one type of account, this annual limit includes all of your collective contributions.

Jessica Walrack and Rachel Layne contributed to this report.

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