What Is a Roth IRA? Rules & How to Open One - NerdWallet (2024)

FAQs

What is a Roth IRA and how do I open one? ›

A Roth IRA is an easy way to save for retirement using after-tax dollars to invest. With basic identification, a Social Security card, and a funding source, you can open one online at most banks or investment companies such as Fidelity, Vanguard, or with other asset management companies.

If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023 and $161,000 for tax year 2024 to contribute to a Roth IRA, and if you're married and filing jointly, your MAGI must be under $228,000 for tax year 2023 and $240,000 for tax year 2024.

The Roth IRA contribution limit is $7,000 in 2024. You can add $1,000 to that amount if you're 50 or older. But there are income limits that restrict who can contribute. Those income limits are based on your modified adjusted gross income, or MAGI.

Are You Too Old for a Roth IRA? There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. Roth IRAs can provide significant tax benefits to young people.

If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.

Regardless of your account balance or how often you trade, you can open an account with a $0 minimum deposit plus get $0 online listed equity trade commissions.

Opening a Roth IRA is easy — anyone within the IRS's income limits is eligible to make a contribution. Opening a Roth IRA early in your career or when you start your first job can help you meet the eligibility requirements and give you more time for tax-free growth potential.

However, not all income is considered to be “earned.” Unearned income, which is ineligible for a Roth IRA, accounts for earnings you receive from passive sources. This includes things like interest, dividends, rental income and capital gains.

Can I open a Roth IRA at my bank? ›

In 2023, the limit increased to $6,500 (plus the additional $1,000 for those 50 and older). In 2024, the limit increases again to $7,000 with the catch-up contribution remaining at $1,000. Almost all brokerage firms, both brick-and-mortar and online, offer a Roth IRA. So do most banks and investment companies.

Bank Roth IRAs are insured by Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Brokerages may offer a broader range of Roth IRA investment options than some banks. In most cases, buying a Roth IRA from a brokerage makes more sense when you're trying to fund a comfortable retirement.

The Bottom Line. In many cases, a Roth IRA can be a better choice than a 401(k) retirement plan, as it offers more investment options and greater tax benefits. It may be especially useful if you think you'll be in a higher tax bracket later on.

A Roth IRA differs from a traditional IRA in several ways. Contributions to a Roth IRA aren't deductible (and you don't report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren't subject to tax.

Because the maximum annual contribution amount for a Roth IRA is $6,000, following a dollar-cost-averaging approach means you would therefore contribute $500 a month to your IRA. If you're 50 or older, your $7,000 limit translates to $583 a month.

Regardless of whether you work with a pro or sign up on your own, you'll have some paperwork (or online forms) to fill out to open your Roth account. Make sure you've got all the information below handy once you're ready to fill out the forms: Your driver's license or other government-issued form of photo ID.

Many companies offer a Roth IRA, including banks, brokerages and robo-advisors, and each allows you to make various types of investments.