Having to get a root canal is already painful enough — but then comes the prospect of paying for it.
While the specific cost of a root canal will vary depending on your geographical location, the location of the tooth, your dentist, and other factors, it can easily cost as much as $1,600 or even more out of pocket if you don’t have insurance — and several hundred even if you do.
Fortunately, there are a variety of ways to finance dental work that make it possible to afford the care your teeth require. Here’s what you need to know.
What Is a Root Canal Treatment?
A root canal is a dental treatment that can remove infection and bacteria from the pulp beneath the hard exterior of the tooth. It’s a pretty common procedure — millions of them are performed each year.
While root canals are often characterized as unpleasant, modern dentistry means this medical intervention can take place relatively painlessly while preserving the natural tooth for both chewing and complementing a smile. All of which is to say, if you’re in need of a root canal, you’re not alone.
Reasons for a Root Canal
There are many different reasons your dentist might prescribe a root canal, including:
• Tooth decay
• Large cavities
• Chips in tooth enamel
• Periodontal disease
• Dental trauma
In any of these situations, bacteria might infect the pulp of the tooth and, if left untreated, the infection can spread to the surrounding structures such as gums, other teeth, or even the jawbone. In extreme cases, dental infections can contribute to heart attack or stroke, along with causing a lot of pain.
Taking good care of your teeth can help prevent these causes, but sometimes, accidents or predisposition to decay can play into the equation. In any case, if your dentist prescribes a root canal, it’s probably worth heeding their advice.
How Much Does a Root Canal Cost on Average?
While, again, the cost of a root canal procedure varies greatly depending on factors we’ll dive into in more depth below, the average cost hovers around $1,600 without insurance. With insurance, your bill might be considerably lower: between $200-$1,000 out of pocket, depending on your coverage and the extent of the procedure.
In many cases, you may also require a crown along with a root canal, which can help protect the tooth for future chewing and use. A crown can add a substantial amount to the overall bill: as much as $1,000 if you’re paying out of pocket.
Factors That Impact the Cost of a Root Canal
Here are some of the specific factors at play that can pull the cost of your root canal up or down.
Insurance Coverage
Obviously, the cost of a root canal — or any dental or medical procedure — is likely to be higher if you don’t have insurance coverage or if your provider is out of your insurance company’s network. Because root canals are usually medically necessary, as opposed to just cosmetic, it’s likely your insurer will cover the procedure itself.
Tooth Location
The location of the infected tooth in your mouth can also have an impact on the total cost of the root canal. That’s because certain teeth are more difficult for dentists to work on than others.
For instance, molars, which are set more deeply in the mouth, are harder to reach and thus command higher costs for dental procedures. Bicuspids, or premolars, cost slightly less, while front teeth needing root canals are likely to cost the least.
Geographical Location
Like most other goods and services, the cost of a root canal can vary largely depending on the local economy — or the prices set by the dental professional you choose.
Type of Dentist
While most general dentists can perform a simple root canal, some teeth with more complicated infections might require an endodontist, who specializes in dental pulp specifically (the part that is treated during the procedure).
Root canal treatment cost by a specialist may be more expensive than treatment by your general dental professional, as can the use of high-tech equipment such as an ultrasonic needle or water laser.
Root Canal Complications
Although they’re very common and generally safe, like most other medical procedures, root canals do come with some risk.
For example, the root canal can fail due to a breakdown of materials or the provider’s failure to remove all of the bacteria during the procedure. In addition, sometimes the tooth becomes slightly discolored after the procedure due to bleeding on the inside of the tooth.
Ways to Pay For a Root Canal
Although root canals can be expensive, there are many ways to pay for this vitally important procedure without chewing through your savings.
Dental Insurance
Carrying dental insurance is a great way to lower the cost of procedures such as root canal — though keep in mind you’ll be responsible for monthly premiums as well as a potential copay or coinsurance costs.
Health Savings Account
A health savings account is a tax-incentivized account that can help you save and pay for out-of-pocket medical expenses more affordable. However, you must have a high deductible health plan to contribute to one.
Personal Loan
Personal loans are a type of financial product that allows you to borrow money for almost any purpose, including dental or medical care. Because they’re unsecured, meaning no collateral is required, they tend to have higher interest rates than auto loans or mortgages — but the rates can be lower than those offered by credit cards.
As with most financial products, your specific rates and terms will vary depending on your credit score and other financial aspects. While rates may be higher, there are still personal loans for low-credit borrowers — and taking one out may still make more financial sense than decimating your emergency fund or putting the procedure on credit.
Credit Card
Although they usually have fairly high interest rates, credit cards are another option for paying for necessary medical interventions in a pinch. If you can qualify for a credit card with a 0% promotional interest rate, you’ll have some time to pay the balance without interest if you can pay it off before the promotional period ends.
Along with root canals, personal loans can be used to cover other common dental procedures, as well, including:
• Periodontal surgery
• Dentures
• Tooth bonding
• Wisdom tooth removal
• Dental fillings
The Takeaway
Having a root canal can be an important medical intervention for your health and the survival of your affected tooth. And although the procedure is expensive, there are ways to pay for it that won’t add financial pain to your dental pain.
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FAQ
How much is a root canal and a crown?
A root canal procedure averages $1,600, and the restorative crown can add another $1,000 the total cost. Costs can vary depending on what part of the country the procedure is performed in and which tooth is being treated.
Why is a root canal so expensive?
Root canals are performed by licensed medical professionals who use specialized equipment. More complex situations may need to be treated by an endodontist, a dental specialist who has completed additional years of training beyond dental school.
What does a root canal cost without insurance?
The full, out-of-pocket cost of a root canal may range from $800 to $1,800, depending on a variety of factors.
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A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.
Keep reading for more insight into what the principal of a loan is and how it affects repayment.
Loan Principal Meaning
What is the principal of a loan? When someone takes out a loan, they are borrowing an amount of money, which is called “principal.” The principal on a loan represents the amount of money they borrowed and agreed to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.
Does a Personal Loan Have a Principal Amount?
Yes, a personal loan does come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.
The loan principal is different from interest. The principal represents the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Payments made by the borrower are applied to both the principal and interest.
Along with the interest rate, a lender may also disclose the annual percentage rate (APR) charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest. As the borrower makes more payments and makes progress paying off their loan principal amount, less of their payments will go towards interest and more will apply to the principal balance. This principal is referred to as amortization.
Loan Principal and Taxes
Personal loans aren’t considered to be a form of income so the amount borrowed is not subject to taxes like investment earnings or wages are. The borrower won’t be required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.).
As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, some lenders charge borrowers a prepayment penalty if they pay their personal loan off early. Not all charge a prepayment penalty. When shopping for a personal loan, it’s important to inquire about extra fees like this to have a true idea of what borrowing that money may cost.
The borrower’s personal loan agreement will state if they will need to pay a prepayment penalty for paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate if paying that fee would cost less than continuing to pay interest for the personal loan’s originally planned term.
How Can You Pay Down the Loan Principal Faster?
It’s understandable why some borrowers may want to pay down their loan principal faster than originally planned as it can save the borrower money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.
Interest Payments
When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. That means that each month as they make a new payment, they reduce their principal and the interest they’ll owe in the future. As previously noted, paying down the principal faster can help the borrower pay less interest.
Personal loan lenders allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going towards the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.
Shorten Loan Term
Refinancing a loan and choosing a shorter loan time can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate, which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.
Cheaper Payments
Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, they may opt to pay extra toward the principal and possibly pay the loan in full before the end of the term.
Other Important Information on the Personal Loan Agreement
A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.
Loan Amount
An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.
Loan Maturity Date
A personal loan’s maturity date is the day the final loan payment is due.
The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.
The Takeaway
Understanding how a personal loan works can make it easier to pay one-off. To recap: What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back.
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FAQ
What is the principal balance of a loan?
The principal balance of a loan is the amount originally borrowed that the borrower agrees to pay back.
Does the principal of the loan change?
The original loan principal does not change. The principal amount included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the beginning of the loan and incrementally increases over the life of the loan.
How does loan principal work?
The loan principal represents the amount borrowed. Usually, this is done in monthly payments until the loan principal is fully repaid.
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Market overhang is a market phenomenon whereby investors hold off trading a stock that’s seen a drop in price, because the expectation is the price will drop even further. A market or stock overhang can be precipitated by the awareness that a large block of shares — say, from an institutional investor — is about to hit the market, potentially driving a stock’s price down.
But it can result from other factors as well. Although the event has not happened, investors may hesitate to sell or buy shares in anticipation of price drop — and this can further depress the stock price. While there is also a business use of the term “overhang,” for investors, it may be useful to focus on how market overhang works in finance, specifically.
Market Overhang Definition
In its broadest use, an overhang describes a somewhat artificial market condition brought on by an anticipated shift in supply and demand (aka the price of a stock). Market overhang has a couple of uses in the business and finance worlds, and in an IPO market as well.
What Is an Overhang in Business?
An overhang in a business context can refer to the practice whereby a company, typically an industry leader, delays the release of a new product in order to stoke greater consumer demand for that product.
A familiar example might be the release of a new technology product or video game. The anticipation of the new release may cause consumers to avoid buying other products as they wait for the arrival of the new one. The overhang may result in lower purchases for existing products — and higher purchases of the newly released product. While this practice can be considered manipulative, it’s not uncommon.
What Is an Overhang in Finance?
More commonly: An overhang in finance is used to describe a dynamic that’s specific to how investors’ expectation about supply and demand can impact a company’s share price.
A market overhang is when a stock’s price declines because investors expect a further price drop on the horizon. Thus, some shareholders may hesitate to sell their shares, because that could further drive down the share price. Other investors may also hesitate to buy shares because of the anticipated price drop.
The business use of the term and the finance use describe different situations, but the common element is how investors’ anticipation of a future event can impact a company’s revenues or share price.
Needless to say, a market overhang can cast a shadow over a company’s performance, influencing share price, liquidity, and more, especially if the situation is prolonged. In many cases, though, market overhang is relatively short-lived and temporary. The difficulty for investors is knowing when the overhang, like bad weather, is finally going to pass. To that end, it helps to know some conditions that can cause a market overhang.
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How Market Overhang Is Created
There are a few conditions that can lead to a market overhang. Often these conditions can overlap.
A Stock Decline
The first is where a stock is already declining, perhaps owing to a change in key economic indicators or market conditions, and there is a buildup of selling pressure as investors hesitate to let go of their shares in a down market. This type of market overhang may be resolved once there are signs of price stability (even if it’s at a lower level).
The Role of Institutional Investors
Another type of stock overhang can be created by institutional investors — or companies that manage investments on behalf of clients or members of a firm. Institutional investors tend to have a larger stake in a particular stock compared with individual investors. This means that when the institutional investor plans to sell a large portion of their shares, a market overhang could kick in when investors become aware of this possible sale.
The anticipation of a large block of shares entering the market could drive prices down, and thus investors might hold off trading this particular stock — affecting its price, even before the institutional investor has made a move.
The stock overhang might be worse if it occurs during a price decline. In that case, investors may see the decline in share price, become aware that a large investor may sell a block of shares (which could further depress the price), become even more wary of buying or selling the company’s shares.
IPOs and Market Overhang
A third way that market overhang may occur is after an initial public offering (IPO). An IPO market can be a hot market, after all, and a company may get significant press coverage as its IPO approaches, which can drive up the stock price.
But if the IPO isn’t a big hit, and the share price isn’t what investors hoped (in IPO terms), there might be a bit of an overhang as investors wait for the lock-up period to end. The lock-up period is when company insiders can sell their shares, potentially flooding the market and further lowering the price.
Understanding the Effects of Market Overhang
Market overhang can last for a few weeks or even months — sometimes longer. The chief impact of a market overhang is that it can artificially depress the price of a stock, and if the market overhang is prolonged, that can have a negative impact on company performance.
As noted above, a market overhang typically ends when a stock price stabilizes. Unfortunately that often occurs at a lower price point than before the shares began to decline.
Example of Market Overhang
While some consider the market overhang phenomenon more anecdotal than technical, it’s something to watch out for. It could present an opportunity. And it doesn’t require a complicated, technical stock analysis to understand.
For example, let’s say a large tech company is trading at $300 a share. But there are reports that the company has been facing some headwinds, and it may undergo a rebranding and repositioning. In the face of this change and uncertainty, it’s natural that it might impact company performance and the share price might wobble a bit. But then, if enough investors are concerned about the company’s “new direction,” there could be a bigger shift in trading behavior that might further depress the share price in advance of the company pivot — creating an overhang.
While this isn’t ideal for current shareholders, a market overhang like this could be a “buy” opportunity for other investors. It depends on a number of factors, and it’s always important to understand market trends as well as company fundamentals. But it’s possible that some investors may view the company as a good prospect, despite a currently undervalued share price, and buy shares with the hope they might rise to their previous levels.
Why Market Overhang Matters
Market overhang is a valuable phenomenon for investors to be aware of, largely because it reflects many of the basic tenets of behavioral finance, which is the study of how emotions can impact financial choices. A market overhang could be viewed as the result of loss aversion and herd mentality — two well-documented behavioral patterns among investors.
Loss aversion is, as it sounds, the wish to avoid incurring losses. Herd mentality is, not surprisingly, the tendency for investors to behave as a group: buying or selling in waves. You can see how these two very human impulses — to protect oneself from losses, and to follow the herd — might create a market overhang.
The good news, though, is that investors are capricious and markets can be volatile, which means the market overhang will usually pass, and the stock will regain its normal momentum, whatever that may be. As an investor watching the market change, it’s up to you whether a stock overhang might present a buy opportunity or a sell opportunity — if you need to harvest some losses, for tax purposes.
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What Market Overhang Means for Shareholders
Market overhang affects different shareholders differently. Since institutional investors tend to be the ones who create market overhang, they also tend to have the upper hand on what it means for their investments.
Regular investors might worry that some of their shares are losing value. But with the ebbs and flows of the stock market, a price can rise and fall at various times throughout the year — even throughout a given day. Fluctuation is normal and this is part of the risk in investing in the stock market. Consider waiting out the storm to make an informed decision. There’s a chance the stock could rise to new highs and your investment will be worth even more.
The Takeaway
A market overhang is a type of trend that is considered more behavioral in nature, but it can be worthwhile for investors to keep it in mind when a stock isn’t performing as expected. In some cases, when investors anticipate an event that could drive down a stock’s price, they may hold off on trading that stock, further depressing the price and creating a market overhang. In that sense, a market overhang can become a self-fulfilling prophecy.
Institutional investors can create a market overhang, for example, when they contemplate selling a large portion of their holdings. This might spook other investors, who likewise decide not to trade their shares, creating a sort of temporary downward spiral in the share price. But because two common investor dynamics are at play here — the fear of losses, and the desire to comply with what other investors are doing — the emotions are usually temporary, and the market overhang passes.
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With flight disruptions, natural disasters, and other issues, travel insurance has become a popular option for travelers. While you can purchase travel insurance through third-party providers (and get specific insurance when booking flights, hotels, and rental cars), you may already have credit card travel insurance at your disposal.
So, should you choose a credit card specifically because it offers travel insurance? Below, we’ll take a closer look at what credit card travel insurance is, how it works, what it covers, and why you might want a credit card with travel insurance ahead of your next adventure.
What Is Travel Insurance?
Travel insurance protects consumers against financial losses when traveling domestically or internationally. It can cover everything from lost luggage to new hotel arrangements because of canceled flights to medical emergencies while on vacation.
Travel insurance can also protect you before your trip. If something changes, like a family emergency, that will keep you from traveling as planned, travel insurance might get you a refund for your expenses.
You can find travel insurance through insurance companies, travel agents, and insurance comparison sites. Your car insurance policy may insure you even in a rental car, and certain hotel booking sites may allow you to make refundable accommodations for a fee. But did you know that your credit card may also already cover portions of your trip?
How Does Credit Card Travel Insurance Work?
Credit card travel insurance is a set of coverages offered by select credit cards to protect you when traveling on qualified trips. How credit card travel insurance works varies by card, however. It’s important to read the fine print of your credit card to understand what may and may not be covered.
The main thing to remember is that you typically need to use the credit card when booking your major travel expenses (airfare, lodging, and transportation) for those costs to be covered should something happen.
Each travel credit card will have its own inclusions and exclusions for travel insurance. But generally, credit cards with travel insurance may offer trip protection and coverage for unexpected medical expenses.
Trip Protection
Trip protection covers a wide range of potential insurances your credit card might offer when traveling:
• Trip cancellation and interruption insurance: If you prepaid for a trip and have to cancel it, or are on a trip and need to end it early, your credit card may cover this. Read your credit card’s policy closely to understand how your credit card works and what qualifies as a covered trip cancellation or trip interruption. Unexpected injuries or illness, inclement weather, terrorist action, a change in military orders, and jury duty are examples of reasons a trip may be canceled or end early — and be covered by credit card travel insurance.
• Trip delay insurance: If your flight, bus, cruise, or other transportation (called a common carrier) is delayed or canceled and you miss activities or lodgings that you’ve already paid for, your credit card may cover this. In addition, such policies might cover your expenses as you scramble to find new lodging, meals, and transportation.
• Rental car insurance: Check with your car insurance provider before booking a rental to understand if your coverage extends to rentals. If it does not (or if you do not want to make a claim with your car insurance provider), your credit card might also serve as an insurance option in the event of an accident. Read the fine print carefully; many credit cards require that you decline the insurance from the rental company for the credit card travel insurance to apply. Some credit cards only offer secondary car insurance, meaning they require you to file a claim through your personal car insurance first.
• Delayed or lost baggage insurance: If an airline loses or damages your baggage, you can make a claim for the (depreciated) contents of the bag. Some credit cards may even cover delayed baggage since it can put a dent in your plans. Just check your policy: You may have to put in a claim with the airline before your travel credit card will step in.
Medical Coverage
Travel insurance through credit cards may cover medical expenses as well, including:
• Medical insurance: If your health insurance doesn’t cover medical costs incurred abroad, travel medical insurance might cover qualified expenses. In most cases, Medicare does not cover health costs incurred outside of the U.S., so travel insurance can be helpful for seniors relying on a government health plan.
• Accident insurance: While we don’t want to assume the worst can happen, this insurance sometimes offered through credit cards offers a payout if you are killed or seriously injured (such as dismemberment or loss of sight, hearing, or speech). This applies while traveling on a common carrier or on a covered trip paid for with the card. In this way, accident insurance can operate like life insurance while traveling.
• Emergency evacuation: If you fall ill or are injured while traveling and need to be evacuated, including through emergency airlift, this coverage will pay for associated expenses. This also may cover emergency evacuations due to extreme weather or political unrest.
Credit cards offering travel insurance have multiple benefits. Not all credit cards offer travel insurance, however, so it’s a good idea for consumers to weigh these benefits against benefits of other credit cards to determine which card is right for them.
Among the benefits of credit card insurance are:
• Financial security: Travel can be a big expense. When unplanned events cut trips short or leave you stranded, travel insurance can protect the money you have spent.
• Emergency coverage: Whether you encounter dangerous weather, a terrorist incident, or a medical emergency during travel, having travel insurance can make it easier to deal with crises while on vacation.
• A sense of comfort: Ultimately, insurance policies can ease consumers’ worries when traveling. Knowing that there is a Plan B when your best-laid travel plans go awry can be comforting, especially when facing an emergency in an unfamiliar place.
When looking for a new credit card, you can search specifically for cards that offer travel insurance among different credit card rewards. Note that many of these can have annual fees, so they might only be a good choice if you’re a frequent traveler.
If travel insurance is not your top priority for choosing a credit card, you can consider other incentives, like credit card bonuses for new customers or cash back rewards.
If you experience an unexpected event, like a delayed flight, during your trip, calling your credit card company to ensure your emergency expenses will be covered can be a smart idea. This might keep you incurring credit card payments for meals or lodging that won’t actually be covered.
Look at the back of your credit card to find the phone number for a benefits administrator. They can help you as you begin your claim process.
As explained previously, certain credit cards may require you to file a claim with another entity before they get involved. For example, a credit card offering secondary auto insurance requires that you file with your personal car insurance company first. Likewise, if an airline loses your luggage, a credit card’s travel insurance policy may stipulate that you file first with the airline.
When you know you will be filing a claim, saving your receipts (and taking photos of them as you go) can be a smart way to stay organized. Filing as soon as you’re home (or even while still traveling) may expedite the process. In fact, some credit card insurance policies might have deadlines for filing claims.
The Takeaway
Some credit cards include travel insurance among their perks. Insurance coverage can vary, but it might cover delayed flights, trip cancellations, emergency medical expenses, and lost luggage. Travel cards with such coverage often have annual fees, so it’s a good idea for consumers to weigh multiple options when selecting a credit card and insurance policies.
Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you.
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FAQ
How do I know if my trip is covered?
Not every credit card offers travel insurance. Always read the fine print of your credit card before making travel insurance decisions ahead of and during your trip. If the legal jargon is confusing, you can typically contact a benefits administrator for clarification. Look at the back of your credit card to find the number.
What does travel insurance cover?
Every credit card travel insurance policy is different. Common coverages include trip cancellation or interruption, accident and medical, lost luggage, and even rental car insurance. Research your card’s policy ahead of your next vacation.
Will the expenses not charged to my card be covered?
Some credit cards with travel insurance require that you use those cards on travel expenses for the insurance to apply. Others may automatically apply certain types of coverage, like medical coverage, regardless of what card you used to book your trip. Reach out to your card’s benefits administrator before travel if you need help interpreting the travel insurance policy.
When you use your SoFi Credit Card to make a purchase on the SoFi Travel Portal, you will earn a number of SoFi Member Rewards points equal to 3% of the total amount you spend on the SoFi Travel Portal. Members can save up to 10% or more on eligible bookings.
Eligibility:
You must be a SoFi registered user.
You must agree to SoFi’s privacy consent agreement.
You must book the travel on SoFi’s Travel Portal reached directly through a link on the SoFi website or mobile application. Travel booked directly on Expedia's website or app, or any other site operated or powered by Expedia is not eligible.
You must pay using your SoFi Credit Card.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, and then withdraw the money tax free in retirement. A Roth IRA is different from a traditional IRA, which is a tax-deferred account: meaning, you contribute pre-tax dollars — but you owe tax on the money you withdraw later.
Many people wonder what a Roth IRA is because, although it’s similar to a traditional IRA, the two accounts have many features and restrictions that are distinct from each other. Roth accounts can be more complicated, but for many investors the promise of having tax-free income in retirement is a strong incentive for understanding how Roth IRAs work.
Key Points
• A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.
• Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are not subject to income tax.
• Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.
• Unlike traditional IRAs, Roth IRAs do not require minimum distributions during the account holder’s lifetime.
• Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.
What Is a Roth IRA?
A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.
That said, because you’re making after-tax contributions, you can’t deduct Roth deposits from your income tax the way you can with a traditional IRA.
Understanding Contributions vs Earnings
An interesting wrinkle with a Roth IRA is that you can withdraw your contributions tax and penalty-free at any time. That’s because you’ve already paid tax on that money before initially depositing or investing it.
Withdrawing investment earnings on your money, however, is a different story. Those gains need to stay in the Roth for a minimum of five years before you can withdraw them tax free — or you could owe tax on the earnings as well as a 10% penalty.
It’s important to know how the IRS treats Roth funds so you can strategize about the timing around contributions, Roth conversions, as well as withdrawals.
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Roth IRA Eligibility
Technically, anyone can open an IRA account, as long as they have earned income (i.e. taxable income). The IRS has specific criteria about what qualifies as earned income. Income from a rental property isn’t considered earned income, nor is child support, so be sure to check.
There are no age restrictions for contributing to a Roth IRA. There are age restrictions when contributing to a traditional IRA, however.
How to Open a Roth IRA
Roth IRA Annual Contribution Limits
For 2024, the annual limit is $7,000, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up provision, for those closer to retirement.
Remember that you can only contribute earned income. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.
One exception is in the case of a spousal Roth IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income.
Other Roth IRA Details
Since Roth IRAs are funded with after-tax income, contributions are not tax-deductible. One exception for low- and moderate-income individuals is something called the Saver’s Credit, which may give someone a partial tax credit for Roth contributions, assuming they meet certain income and other criteria.
Note that the deadline for IRA contributions is Tax Day of the following year. So for tax year 2023, the deadline for IRA contributions is April 15, 2024. But, if you file an extension, you cannot further postpone your IRA contribution until the extension date and have it apply to the prior year.
In addition, with a Roth there are important income restrictions to take into account. Higher-income individuals may not be able to contribute the full amount to a Roth IRA; some may not be eligible to contribute at all.
It’s important to know the rules and to make sure you don’t make an ineligible Roth contribution if your income is too high. Those funds would be subject to a 6% IRS penalty.
For 2023:
• You could contribute the full amount to a Roth as long as your modified adjusted gross income (MAGI) was less than $138,000 (for single filers) or less than $218,000 for those married, filing jointly.
• Single people who earned more than $138,000 but less than $153,000 could contribute a reduced amount.
• Married couples who earned between $218,000 and $228,000 could also contribute a reduced amount.
• For single and joint filers: in order to contribute the full amount to a Roth you must earn less than $146,000 or $230,000, respectively.
• Single filers earning more than $146,000 but less than $161,000 can contribute a reduced amount. (If your MAGI is over $161,000 you can’t contribute to a Roth.)
• Married couples who earn between $230,000 and $240,000 can contribute a reduced amount. (But if your MAGI is over $240,000 you’re not eligible.)
If your filing status is…
If your 2023 MAGI is…
If your 2024 MAGI is…
You may contribute:
Married filing jointly or qualifying widow(er)
Up to $218,000
Up to $230,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
$218,000 to $228,000
$230,000 to $240,000
A reduced amount*
Over $228,000
Over $240,000
Cannot contribute
Single, head of household, or married filing separately (and you didn’t live with your spouse in the past year)
Up to $138,000
Up to $146,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
From $138,000 to $153,000
From $146,000 to $161,000
Reduced amount
Over $153,000
Over $161,000
Cannot contribute
Married filing separately**
Less than $10,000
Less than $10,000
Reduced amount
Over $10,000
Over $10,000
Cannot contribute
*Consult IRS rules regarding reduced amounts. **You did live with your spouse at some point during the year.
Advantages of a Roth IRA
Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.
• No age restriction on contributions. With a traditional IRA, individuals must stop making contributions at age 72. A Roth IRA works differently: Account holders can make contributions at any age as long as they have earned income for the year.
*You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can be tricky, because they’re both tax-deferred accounts. But a Roth is after-tax, so you can contribute to a Roth and a 401(k) at the same time (and stick to the contribution limits for each account).
• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.
• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for at least five years, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions + earnings.
• No required minimum distributions (RMDs). Unlike IRAs, which require account holders to start withdrawing money after age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed, without fear of triggering a penalty.
Disadvantages of a Roth IRA
Despite the appeal of being able to take tax-free withdrawals in retirement, or when you qualify, Roth IRAs have some disadvantages.
• No tax deduction for contributions. The primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts (e.g. a SEP IRA, 401(k), 403(b)).
• Higher earners often can’t contribute to a Roth. Affluent investors are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion. (There are no income limits for converting a traditional IRA to a Roth, but you’ll have to pay taxes on the money that goes into the Roth — though you won’t face a penalty.)
• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must wait five years to take qualified withdrawals of contributions and earnings, or face a penalty (some exceptions to this rule apply; see below).
Last, the downside with both a traditional or a Roth IRA is that the contribution limit is low. Other retirement accounts, including a SEP-IRA or 401(k), allow you to contribute far more in retirement savings. But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA as well.
Since you have already paid tax on the money you deposit, you’re able to withdraw contributions at any time, without paying taxes or a 10% early withdrawal penalty.
For example, if you’ve contributed $25,000 to a Roth over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your actual deposits.
Withdrawing any of the $2,500 in earnings would depend on your age and the 5-year rule.
The 5-Year Rule
What is the 5-year rule? You can withdraw Roth account earnings without owing tax or a penalty, as long as it has been at least five years since you first funded the account, and you are at least 59 ½. So if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.
The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth.
There are some exceptions that might enable you to avoid owing tax or a penalty.
Non-Qualified Withdrawals
Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.
• If you meet the 5-year rule, but you’re under 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases.
• If you don’t meet the 5-year criteria, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.
There are some exceptions that might help you avoid paying a penalty, but you’d still owe tax on the early withdrawal of earnings.
Exceptions
Again, these restrictions apply to the earnings on your Roth contributions. (You can withdraw direct contributions themselves at any time, for any reason, tax and penalty free.)
You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes, as long you’ve been actively making contributions for at least five years, in certain circumstances, including:
• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.
• Disability. You can withdraw money if you qualify as disabled.
• Death. Your heirs or estate can withdraw money if you die.
Additionally you can avoid the penalty, although you still have to pay income tax on the earnings, if you withdraw earnings for:
• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.
• Medical insurance premiums. During a time in which you’re unemployed.
• Qualified higher education expenses.
Not only are the early withdrawal restrictions looser than with a traditional IRA, the post-retirement withdrawal restrictions are lesser, as well. Whereas account holders are required to start taking distribution of funds from their IRA after age 73, there is no pressure to take distribution from a Roth IRA at any age.
Roth IRA vs Traditional IRA
There are certain things a Roth IRA and a traditional IRA have in common, and several ways that they differ:
• It’s an effective retirement savings plan: Though the plans differ in the tax benefits they offer, both are a smart way to save money for retirement.
• Not an employer-sponsored plan: Individuals can open either type of IRA through a financial institution, and select their own investments or choose an automated portfolio.
• Maximum yearly contribution: For 2023, the annual limit is $6,500, with an additional $1,000 allowed in catch-up contributions for individuals over age 50. For 2024 it’s $7,000, and $8,000 if you’re 50 and older.
There are also a number of differences between a Roth and a traditional IRA:
• Roth IRA has income limits, but a traditional IRA does not.
• Roth IRA contributions are not tax deductible, but contributions you make to a traditional, tax-deferred IRA are tax deductible.
• Roth IRA has no RMDs. Individuals can withdraw money when they want, without the age limit imposed by a traditional IRA.
• Roth IRA allows for penalty-free withdrawals before age 59 ½. While there are some restrictions, an account holder can typically withdraw contributions (if not earnings) before retirement.
Is a Roth IRA Right for You?
How do you know whether you should contribute to a Roth IRA or a traditional IRA? The quiz below or this checklist might help you decide.
• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution there. You can fund a Roth IRA and an employer-sponsored plan.
• Because contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.
• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.
• A Roth IRA can be helpful if you think you’ll work past the traditional retirement age.
The Takeaway
A Roth IRA has many of the same benefits of a traditional IRA, with some unique aspects that can be attractive to some people saving for retirement. With a Roth IRA you don’t have to contend with required minimum distributions (RMDs); you can contribute to a Roth IRA at any age; and qualified withdrawals are tax free. With all that, a Roth IRA has a lot going for it.
That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your annual household income cannot exceed certain limits. Also, even though you can withdraw your Roth IRA contributions at any time without owing a penalty, the same isn’t true of earnings.
You must have been funding your Roth for at least 5 years, and you must be at least 59 ½, in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw — and possibly a penalty. Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s completely tax free — can outweigh some of the restrictions for certain investors.
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FAQ
Are Roth IRAs insured?
If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.
How much can I put in my Roth IRA monthly?
For tax year 2023, the maximum you can deposit in a Roth or traditional IRA is $6,500, or $7,500 if you’re over 50. How you divide that per month is up to you. You just can’t contribute more than the annual limit.
Who can open a Roth IRA?
Anyone with earned income (i.e. taxable income) can open a Roth IRA, but your income must be within certain limits in order to fund a Roth.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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