How Does a Roth IRA Work?

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What's a Roth IRA?

  • A Roth IRA is a retirement savings account built with post-tax dollars with no required withdrawal date.

  • Roth IRAs must typically be opened outside of an employment context, on an individual basis.

  • Not everyone is eligible for a Roth IRA, because there are income limits.

An IRA stands for an Individual Retirement Account. Some experts describe an IRA as "the basket" where many of your retirement assets are kept, such as mutual funds, stocks, and bonds.

A Roth IRA, which is just one of several types of IRAs, is basically a retirement savings account. Perhaps confusingly, though you only have one IRA, there are several individual accounts within that IRA. This really only means that you can have one Roth IRA account at your investment broker and another at your bank, and they all ultimately make up your retirement assets.

Unlike a traditional IRA, such as a 401(k), a Roth-IRA is funded with money that has already been taxed. This means that when you withdraw your money at retirement, you get exactly what you put in – no tax money comes out. With both types of accounts, your money is not taxed while it is in the account, so it is free to grow without any tax burdens.


Some people like Roth IRAs because they provide a level of flexibility not normally seen with traditional IRAs. This is because you can leave the money in a Roth IRA as long as you want – no need to withdraw it at a specified time, as with traditional IRAs – and you can withdraw from a Roth IRA (without tax penalties) at a much earlier age than you can withdraw from a traditional IRA.

However, a Roth IRA requires your contributions to come entirely from earned income, not from something like inheritance.

Income Limits

Roth IRAs may not be an option for everyone due to income limitations. First, you'll need taxable income, which most people have. Second, you will need to make less than $167,000 if you are married and filing jointly, or less than $105,000 if you are single, head of household, or married filing separately, provided you did not live with your spouse at any time during the previous year.

And those married filing separately who lived with their spouse at any time the previous year are heavily penalized by not being able to contribute unless they made less than $10,000.

Opening a Roth IRA

As always, professionals know best, so the most important question you'll want to ask your investment advisor, if you have one, is where to open the Roth IRA. If you feel savvy enough to make the decision on your own, you can do it through a mutual fund company or a discount broker.

Important things to consider include whether or not there is a minimum initial investment, if the investment options that you want are available, if automatic contributions are allowed, and the types of fees you may get hit with.

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