Enter for a chance to win Christmas cash!

Skip to Main Content

What Is a Roth IRA?

Do you have a hard time remembering the difference between a Roth IRA (individual retirement account) and a traditional IRA? You aren’t alone. While both types of IRAs are designed to help people save for retirement, there’s one big difference.

Roth IRAs are funded with after-tax dollars, and that means your investments grow tax-free. And you can use the money in your Roth IRA tax-free when you retire.

Traditional IRAs are funded with pretax money, so you have to pay taxes on any money you withdraw in retirement.

Clear enough? If you need a little more help remembering the difference between a Roth and a traditional IRA, close your eyes and picture David Lee Roth from Van Halen. He’s wearing spandex and has a frizzy mane of 1980s hair. And what’s his signature tune? “Jump” (as in, for joy) because you don’t have to pay taxes on your Roth IRA.

Tax-free growth is something to get excited about! The Roth IRA is the rock star of retirement accounts. It’s easy to set up, simple to maintain, and comes with tax advantages that help you build wealth and boost your retirement savings over the long haul.

money bag

We filter out sleazy advisors. See up to five investing pros we trust.

So now that you know what a Roth IRA is, let’s dig a little deeper.

How Does a Roth IRA Work?

A Roth IRA is a retirement savings account that allows you to pay taxes on the money you put into it up front. The growth in your Roth IRA and any withdrawals you make after age 59 1/2 are tax-free, as long as you’ve had the account more than five years.

Remember: Your Roth IRA is not an investment in itself—it only holds your investments and determines how those investments are taxed. You can put all kinds of different investments into your Roth IRA.

If you want to contribute to a Roth IRA, you must open and maintain it outside of your employer-sponsored retirement savings plan. Some employers offer Roth 401(k) plans, but we’ll talk about the difference between a Roth IRA and a Roth 401(k) a little later.

What Are the Benefits of a Roth IRA?

The Roth IRA has some serious benefits.

Let’s start with the tax impact. When you make contributions after taxes, that means you’ve already paid taxes on the money you set aside for retirement. That helps your retirement savings go a lot further as it grows tax-free.

So, if your account grows by hundreds of thousands of dollars over time, you won’t owe taxes when you withdraw that money in retirement! That’s a huge perk, especially for folks who expect to be in a higher tax bracket when they retire. Talk about a win!

Here are a few more benefits of a Roth IRA:

  • You’re not required to take distributions at a certain age, unlike the traditional IRA (which requires withdrawals beginning at age 72). 
  • You can keep contributing to your Roth IRA if you choose to work past retirement age, as long as your income still falls within the income limits we’ll discuss a little later. 
  • You can choose beneficiaries to inherit your Roth IRA, and they’ll be able to use the money in the account tax-free as well.

How Much Money Do You Need to Start a Roth IRA?

The great thing about Roth IRAs is that you don’t need to invest a ton of money to open an account. In fact, the IRS doesn’t require a minimum amount to open a Roth IRA. Most mutual fund companies require an account minimum to open one, but you can start a Roth IRA with as little as $50 in most cases. 

That means there’s no need to put off investing, people! Once you’re out of debt with a fully funded emergency fund, you can dive right in. The goal is to invest 15% of your income for retirement.

Can You Lose Money in a Roth IRA?

The short answer is, yes. There’s always an element of risk when you invest, but you can minimize your risk by spreading out your investments evenly across four different types of stock mutual funds: growth and income, growth, aggressive growth, and international. That way, you’ll balance and diversify your portfolio between higher-risk investments and more steady and predictable ones.

And listen, if the market has a bad day, don’t panic and take all your money out of the investments in your Roth IRA. That is the worst thing you can do, because all you’re doing is locking in your losses. And if you actually withdraw all the money from your Roth IRA, you’ll get hit with a slew of taxes and penalties if you’re under age 59 1/2! Don’t do it!

Investing in the stock market is like riding a roller coaster—the only people who get hurt are the ones who jump off. The investors who keep their cool and give their money time to grow are the ones who get to the end of the ride safe and sound. When in doubt, reach out to an investment pro for guidance!

Roth IRA vs. Traditional IRA: How Do They Compare?

The main difference between a Roth IRA and a traditional IRA is how they’re taxed. Take a look at a side-by-side comparison:

Traditional IRA

Roth IRA

In most cases, contributions are tax deductible.

Contributions are not tax deductible.

There are no annual income limits on contributions.

In 2021, you can contribute up to the limit if your gross income is less than $125,000 for single filers and $198,000 for married couples filing jointly.1 In 2022, the limit is $129,000 for single filers and $204,000 for married couples.2

You must make annual withdrawals from your IRA after you turn 72.

No withdrawals are required if you are the original owner.

You must pay taxes on withdrawals in retirement.

You are not taxed on withdrawals in retirement.

What Are the 2021 Contribution Limits?

You knew there had to be a catch! Unfortunately, Uncle Sam says you can’t just put as much money as you want into an IRA. For 2021, the total amount you can contribute to either a Roth IRA or a traditional IRA is $6,000—or $7,000 if you’re age 50 or older.3 Those limits are staying the same for 2022.

What Are Roth IRA Income Limits?

A Roth IRA offers some great tax benefits, but it does have some income limits.

Income Restrictions if Single

For 2021, single tax filers must have a modified adjusted gross income (MAGI) of less than $125,000 to contribute the maximum amount of $6,000 ($7,000 if age 50 or older) to a Roth IRA.4 The income limit bumps up to $129,000 for 2022.

For 2021, what if you make more than $125,000? If your MAGI is between $125,000 and $140,000, you can still contribute, but the amount you can contribute is gradually reduced as your MAGI approaches $140,000. Once you’re making more than $140,000 as a single filer, you aren’t eligible to contribute to a Roth IRA.5 If your income is too high to contribute to a Roth IRA, you can contribute to a traditional IRA because it doesn’t have income limits.

The income range for partial contributions for 2022 is $129,000 to $144,000.6

Income Restrictions if Married Filing Jointly

Married couples filing jointly must have a modified AGI of less than $198,000 to be able to contribute up to the limit for a Roth IRA. After that, you may qualify to make reduced contributions if your AGI is between $198,000 and $208,000.7

If you have an AGI of $208,000 or higher, you’re not eligible to make Roth IRA contributions.8

If your filing status is...

And your modified AGI is...

Then you can contribute...

Married filing jointly or qualifying widow(er)

Less than $198,000 (2021)

Less than $204,000 (2022)

Up to the limit

Married filing jointly or qualifying widow(er)

Between $198,000 and $208,000 (2021)

Between $204,000 and $214,000 (2022)

A reduced amount

Married filing jointly or qualifying widow(er)

Greater than $208,000 (2021)

Greater than $214,000 (2022)

Zero

Married filing separately and you lived with your spouse at any time during the year

Less than $10,000

A reduced amount

Married filing separately and you lived with your spouse at any time during the year

Greater than $10,000

Zero

Single, head of household, or married filing separately and you did not live with your spouse at any time during the year

Less than $125,000 (2021)

Less than $129,000 (2022)

Up to the limit

Single, head of household, or married filing separately and you did not live with your spouse at any time during the year

Between $125,000 and $140,000 (2021)

Between $129,000 and $144,000 (2022)

A reduced amount

Single, head of household, or married filing separately and you did not live with your spouse at any time during the year

Greater than $140,000 (2021)

Greater than $144,000 (2022)

Zero

If you’re self-employed, here’s another option: Establish a Simplified Employee Pension (SEP) or a Solo 401(k) plan. Or if you run a small company with employees, consider a SIMPLE IRA that will allow you and your team members to save for retirement. If your income exceeds the eligibility limits, good for you—but bad for your ability to open a Roth IRA. You won’t be able to stash your cash in a Roth IRA, but a traditional IRA might be an option. Tax benefits for traditional IRAs have different eligibility requirements, so check with your investing pro to see if it’s a good choice for you.

Am I Eligible to Contribute to a Roth IRA?

Do you earn income and is it less than the Roth income requirements? Then, yes. You’re eligible. However, you can’t contribute more than you make. So, if your 19-year-old son or daughter earned $3,000 waiting tables over the summer, they can only contribute up to $3,000 to a Roth IRA. It’s also okay for you to contribute the $3,000 on their behalf.9

Another perk: There are no age restrictions with Roth IRAs. Whether you’re 17 years old or you just turned 92, you can contribute to your account as long as you’re earning an income.

Can I Set Up a Roth IRA for My Spouse Who Doesn’t Work?

Yes. If you file a joint income tax return and at least one of you has a taxable income, you can both contribute to your own separate Roth IRAs. But the IRS income-eligibility limits still apply.

Let’s say 40-year-old John makes $150,000 and his wife, Kate, stays home with their kids. John can put up to $6,000 in his IRA. Kate can open a spousal IRA in her name and contribute the maximum amount of $6,000 as well.

Is a Roth IRA the Same Thing as a Roth 401(k)?

No. But both accounts are taxed the same way. Adding the word Roth to the name of either savings plan means the money you contribute will be taxed up front, will grow tax-free, and can be withdrawn tax-free after age 59 1/2.

Roth 401(k) plans are sponsored by employers. If you receive an employer match on your Roth 401(k), the match is not tax-favored. That means the growth from your employer’s match will be taxed when you withdraw your funds in retirement.

If your job offers you a Roth 401(k) with a match, take it! You can contribute to both a Roth IRA and a Roth 401(k) at the same time.

How Do I Set Up a Roth IRA?

The best way to open a Roth IRA is with the help of an investing professional who will meet with you face to face. Before you meet with your investing pro, you’ll need to gather some information and fill out the application. Here’s what you should have on hand in order to open your account:

  • Your driver’s license or other form of photo identification
  • Your Social Security number
  • Your bank’s routing number and your checking or savings account number
  • Your employer’s name and address

As part of the process of starting a Roth IRA, you’ll also choose a beneficiary (or beneficiaries) who could inherit your account. You’ll need their name, Social Security number and date of birth.

Next, you can make your initial deposit and/or set up automatic contributions. You’ll be able to open your Roth IRA with a lump sum up to the annual limit. Or you may choose to deduct a specific amount from your bank account each month. You can actually do both as long as you don’t exceed the contribution limit for that year.

What Should My Roth IRA Be Invested In?

You can invest in almost anything through your Roth IRA, but we recommend mutual funds because they have the potential to help you build wealth over time—especially with a Roth IRA’s tax benefits.

If you feel lost when it comes to picking mutual funds, an investment professional can help you find good growth stock mutual funds with a history of strong returns.

How Do I Maintain My Roth IRA?

Once you choose the mutual funds for your Roth IRA, it’s important to stick with them for the long haul. Don’t panic when the market ebbs and flows. The value of your Roth IRA will rise and fall with the stock market, but over its lifetime, you should see a steady growth trend. Just continue making regular contributions and stick with it despite possible market changes.

Over 30 years, if you invest the annual max of $6,000 into a Roth IRA, it could grow to $1.4 million. (Historically, the 30-year return of the S&P 500 has been roughly 10–12%.10) The best part is, your contributions would only total $180,000, and the rest—$1.2 million—would be tax-free growth.

Those numbers can change depending on how much you invest, how long you have until retirement, and what you expect your annual return to be. You can use our investment calculator to customize those details for your own financial situation.

I’m Ready to Start! Now What?

Opening a Roth IRA is as easy as opening a checking account. The best way to get started is to contact an investing professional who can guide you through the set-up process.

If you don’t have a financial professional, reach out to a SmartVestor Pro in your area. They are committed to educating and empowering you to make the best decisions possible for your retirement future.

Find your pro!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

Related Articles

How to Save for Retirement

How to Save for Retirement

10 Minute Read | Retirement

What does your retirement dream look like? Whether you want to travel the world or spend time with your grandkids, you need a plan! Here’s everything you need to start saving for retirement.

Ramsey Solutions  Ramsey Solutions

What Is the F.I.R.E. Movement?

What Is the F.I.R.E. Movement?

11 Minute Read | Retirement

You know that retirement isn’t an age, it’s a financial number. But is it really possible to retire in your 30s or 40s? Folks in the F.I.R.E. movement think so. Let’s take a closer look.

Ramsey Solutions  Ramsey Solutions

How to Start a Roth IRA

How to Start a Roth IRA

8 Minute Read | Retirement

Think starting a Roth IRA is hard work? Think again! The truth is, opening a Roth IRA is just as easy as opening a checking account. We’ll show you how to do it!

Ramsey Solutions  Ramsey Solutions

Thank you!  Your guide is on its way.

Invest With a Pro Who Gets This Stuff

Invest With a Pro Who Gets This Stuff

Your future is too important for guesswork. Get help from a SmartVestor Pro today.
Find Your Pro

Invest With a Pro Who Gets This Stuff

Your future is too important for guesswork. Get help from a SmartVestor Pro today.
Find Your Pro