A Roth IRA offers a tax-advantaged way to save for retirement. Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Individuals with earned income up to certain limits may be eligible to contribute to a Roth IRA.
A Roth IRA also has some potential drawbacks, however. Weighing the pros and cons of a Roth IRA can help you decide whether it’s a good fit in your retirement portfolio.
What Is a Roth IRA?
A Roth IRA is an individual retirement account that’s funded with after-tax dollars. That means you can’t deduct Roth contributions from your taxes at the time you make them. But in retirement, at age 59 ½ and older, qualified withdrawals are tax-free. That’s the most straightforward way of defining a Roth IRA, and it’s also one of the reasons some investors are drawn to it.
You can have a Roth IRA in addition to a 401(k) or other workplace retirement savings plan. You could also open a Roth IRA to help save for retirement if you don’t have access to an employer-sponsored retirement plan.
The IRS sets annual contribution limits for Roth IRAs, and these limits are adjusted periodically for inflation. For the 2024 tax year, the maximum allowed contribution is $7,000. Those age 50 and older can make an additional catch-up contribution of $1,000 for a total contribution of $8,000.
Roth IRA Eligibility
To open a Roth IRA, you must have earned income, but one of the cons of a Roth IRA is that there are limits on how much you can earn to be eligible.
The chart below illustrates what you can contribute to a Roth IRA based on your modified adjusted gross income (MAGI) and tax filing status.
| Filing status | 2024 MAGI | Roth IRA contribution allowed |
|---|---|---|
| Single | Up to $146,000 | $7,000 ($8,000 for those 50 and older) |
| From $146,000 to $161,000 | Partial contribution | |
| $161,000 or more | $0 | |
| Married, filing jointly | Up to $230,000 | $7,000 ($8,000 for those 50 and older) |
| From $230,000 to $240,000 | Partial contribution | |
| $240,000 or more | $0 | |
| Married, filing separately | Less than $10,000 | Partial contribution |
| $10,000 and more | $0 |
As you can see, high-income earners may be ineligible for a Roth. You could, however, make contributions to a traditional IRA instead.
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Roth IRA vs. Traditional IRA
A traditional IRA is also a tax-advantaged individual retirement account. Traditional IRAs have the same annual contribution limits as Roth IRAs. The main difference between a traditional vs. Roth IRA is their tax treatment.
Traditional IRAs are funded with pre-tax dollars. That means you may be eligible to deduct some or all of the contributions you make each year. In retirement, you’ll pay income tax on qualified withdrawals.
The amount you can deduct in traditional IRA contributions depends on your income, tax filing status, and whether you’re covered by a retirement plan at work.
What Are the Pros and Cons of a Roth IRA?
Saving for retirement in a Roth IRA has advantages, but it may not be the right option for everyone. Here are pros and cons of Roth IRAs.
Pros of a Roth IRA
There are several advantages of a Roth IRA, including:
Tax-Free Growth and Withdrawals
Because Roth IRAs are funded with after-tax dollars, you’ve already paid tax on the money you contribute. Your money grows tax-free while it’s invested, and when you withdraw it in retirement, you pay no taxes on it.
Tax-free withdrawals are beneficial if you expect your income to be higher in retirement than it is during your working years. Any money you take out of a Roth IRA at age 59 ½ or older wouldn’t increase your tax liability as long as it’s a qualified withdrawal.
No Required Minimum Distributions
With traditional IRAs, account holders must begin taking required minimum distributions (known as RMDs) from their account annually once they reach age 73 (assuming they reach age 72 in 2023 or later). If you don’t withdraw the required amount on time, you are subject to a tax penalty.
Roth IRAs do not have RMDs. You can leave the money in your account for as long as you like.
Contributions Can Be Withdrawn Penalty-Free
Ideally, the concept of a Roth IRA is to leave your money in the account until retirement. At age 59 ½ you can begin taking distributions without facing a 10% early withdrawal penalty. However, you can withdraw the contributions you make to a Roth IRA penalty-free at any time.
Your earnings are a different matter. You cannot withdraw your earnings before age 59 ½ without incurring taxes and penalties.
Cons of a Roth IRA
There are some drawbacks to an IRA, which mean these accounts may not be a good fit for everyone. These are the main cons of a Roth IRA to consider.
No Tax Deduction
Roth IRAs don’t offer a tax deduction for the contributions you make. Instead, you have to wait until retirement to reap the tax benefits. Tax-free withdrawals in your golden years could be an advantage, however, if you anticipate being in a higher tax bracket in retirement.
Income Limits Apply
Earning a higher income could put a Roth IRA out of reach for certain individuals, as our chart above indicates. If you’re not eligible for a Roth because of your earnings, you could consider a backdoor Roth IRA.
With a backdoor Roth, you make nondeductible contributions to a traditional IRA and then convert that IRA to a Roth IRA. However, since you’re moving pre-tax dollars into an after-tax account, you’ll owe income taxes on a Roth IRA conversion at the time you complete it, which could be costly.
The 5-Year Rule
Unlike traditional IRAs, Roth IRA accounts are subject to the 5-year rule. This rule says that, barring certain exceptions, your account must be open for at least five years before you can withdraw the earnings tax- and penalty-free at age 59 ½. The 5-year rule also applies to IRA conversions.
Setting Up a Roth IRA
Opening a Roth IRA is relatively easy. You choose where to open the account, fill out the required paperwork, designate a beneficiary, and fund your account.
Like many other investment accounts, you can open a Roth IRA through an online brokerage and link a bank account to it to make your first contribution.
Once you add funds to your IRA, you can decide how to invest them. Typically, brokerages offer options such as mutual funds and index funds. If you’re looking for alternative investments you may want to consider opening a self-directed IRA instead.
Roth IRA Withdrawal Rules
You can withdraw your Roth IRA contributions at any time without taxes or penalties. However, when it comes to earnings, Roth IRA withdrawal rules can be complicated since you have to factor in the five-year rule.
To help simplify things, this at-a-glance chart shows how withdrawals of earnings from a Roth IRA work and when taxes and penalties apply.
| Your age | The account has been open less than five years | The account has been open for five years or more |
|---|---|---|
| Under 59 ½ | Withdrawals of earnings are subject to taxes and penalties, unless an exception (like a disability) applies. | Withdrawals of earnings are not subject to taxes if the money is used for a first-home purchase or the account holder becomes disabled or passes away. |
| 59 ½ or older | Withdrawals of earnings are subject to taxes, but not penalties. | Withdrawals of earnings are tax- and penalty-free. |
Naming a Trust as Your Roth IRA Beneficiary
When you set up a Roth IRA, you need to name a beneficiary. Your beneficiary inherits the money in your Roth IRA after your death.
You can name an individual such as your spouse or child as your IRA beneficiary. You can also designate a trust as your beneficiary. A trust is a legal entity that you transfer your assets to. It’s administered by a trustee who manages your assets for you, according to your wishes.
For example, you might name a trust as the beneficiary of your Roth IRA if you’d like a say in what happens to your assets once you pass away. If you leave your IRA to an individual, they can do what they like with it. A trust allows you to leave specific instructions about how the assets in the trust can be used.
The Takeaway
A Roth IRA offers some unique benefits when it comes to retirement savings. With a Roth IRA, your money grows tax-free, you can make tax-free qualified withdrawals in retirement, and there’s no need for RMDs.
But not everyone is eligible to open a Roth IRA. There are income limits on these accounts, plus you must have funded a Roth for at least five years in order to make qualified withdrawals of your earnings without facing taxes and a penalty.
For those who are eligible for a Roth IRA, the prospect of tax-free withdrawals in retirement may make the potential downsides worth it. Consider all the pros and cons of a Roth IRA to make an informed decision about whether this type of retirement account is right for you.
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FAQs
Are Roth IRAs considered a safe investment?
A Roth IRA is not an investment; it’s an individual retirement account into which you put money that you plan to invest. Your choice of investments, and your risk tolerance, can determine how “safe” your Roth IRA may be. When comparing different investments, consider the risk and possible reward of each one to determine if you’re comfortable with it.
Do Roth individual retirement accounts have income limits?
Roth IRAs do have income limits set by the IRS and updated annually that determine who can contribute. These limits are based on your modified adjusted gross income (MAGI). If your MAGI exceeds the limit allowed for your filing status, you won’t be able to make a Roth IRA contribution. For example, in 2024, a single person with a MAGI of $161,000 or more and a person married filing jointly with a MAGI of $240,000 or more are not eligible to contribute to a Roth IRA.
How much can you contribute to a Roth IRA?
The annual Roth IRA contribution limit is set by the IRS. For the 2024 tax year, the maximum contribution allowed is $7,000, unless you’re 50 or older. In that case, you could contribute an additional $1,000 in catch-up contributions, for a total of $8,000 for the year.
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