What is a Roth IRA?
A Roth Individual Retirement Account (IRA) is funded with money you've already paid taxes on. Growth on that money, as well as your future withdrawals, are then tax-free.1
A Roth IRA is a good choice for people who think their tax bracket will be higher in retirement.
How does a Roth IRA work?
A Roth IRA allows for tax-deferred investment:
You pay taxes on your contributions at the time you put money in and any growth is tax-free.
A Roth IRA allows you to make tax-free withdrawals:
Because you contribute using after-tax money, you don't pay any taxes when you take money out of your account, as long as you follow the Roth IRA rules.1
Can you move your money from a traditional IRA to a Roth IRA?
The short answer is yes, but there are some important considerations to that decision, namely it cannot be undone. Please consult a tax professional in order to understand the tax implications.
What are the key features of a Roth IRA?
In addition to its tax-free advantages, a Roth IRA:1
- Means you pay no taxes on your investment earnings, as long as you follow the Roth IRA rules.1
- Provides access to a broad range of investment options to help meet your needs.
- Allows you to consolidate other qualified accounts in the IRA, so your savings are in one spot, which can help steamline your retirement savings.
- Can be a sound investment strategy, even if you already have an employer plan, like a 401(k).
What are the contribution rules?
As long as you have earned income, you can contribute to a Roth IRA.2
Already have a 401(k)?
Although 401(k)s (retirement plans through an employer) and IRAs (retirement plans you own yourself) are similar in that both are used to save money for retirement, they each have their own distinct rules for contributing.
That means you can contribute to either or both each year, up to the maximum contribution limits for each.3
Traditional or Roth IRA?
A traditional IRA lets you deduct savings contributions from your taxes, which lowers your taxable income for the year - but you pay taxes on the money when you withdraw it in retirement.
A Roth IRA uses after-tax money, meaning you pay taxes on your contributions at the time you put the money in and, future withdrawals are tax free as long as you follow Roth IRA rules.1
| Traditional IRA | Roth IRA |
|---|---|
| Are there income limits? | |
|
You must have earned income, but there's no maximum limit.4 |
To contribute the full amount allowed by the IRA in 2024, your Modified Adjusted Gross Income (MAGI) must be below:
|
| How much can you contribute? | |
|
Up to $7,000; if you're 50 or older, you can contribute an additional $1,000 in 2024. |
|
| When do you pay taxes? | |
|
In retirement, when you withdraw your savings. |
Up front, before you contribute. Your earnings then grow tax free. There are no taxes or penalties on withdrawals made after age 59½.1 |
| Are there rules around withdrawing your money? | |
|
You can withdraw contributions and earnings penalty-free at age 59½, or earlier for certain hardships. You have to start taking required minimum distributions after age 73. |
You can withdraw contributions at any time, without penalty. You can withrdraw earnings penalty-free at age 59½, or earlier for certain hardships, as long as you've followed the rules of a Roth IRA.1 You're not required to withdraw your money at any age. |
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Find a financial professional1 Your account must be open for 5 years and you must be over 59 ½ to be eligible for qualified tax-free withdrawals of earnings.
2 Subject to IRS income limits.
3 Subject to IRS income and deduction limits.
4 Deductibility of contributions is dependent on coverage by an employer-sponsored retirement plan for you or your spouse and your Modified Adjusted Gross Income (MAGI).
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This document is intended to be educational in nature and is not intended to be taken as a recommendation.
When deciding between an employer-sponsored plan and an IRA you should consider the differences in investment options and risks, fees and expenses, tax implications, services and penalty-free withdrawals for your various options. The organization’s retirement plan investment options may have investment expenses lower than similar investment options offered outside the plan. There may be other factors to consider due to your specific needs and situation. You may wish to consult your tax advisor or legal counsel.