When investing for retirement (or early retirement, if you’re a FIRE enthusiast), you’ll want to get to know your investing options. One of these options is a Roth IRA.
A Roth IRA is a type of individual retirement account (IRA) that allows you to invest after-tax dollars for retirement. Here’s how it works.
What is a Roth IRA? How it works & How to start using one
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What will your portfolio look like when you retire?
Take control of it now. Invest in a long-term portfolio on the Public app to supplement your tax-advantaged retirement savings accounts.
How does a Roth IRA work?
A Roth IRA is a type of IRA that lets working Americans invest money that has already been taxed.
This allows investors to leverage their current income tax rate (which may be a lower tax rate than future you), avoiding paying high taxes on withdrawals at an older age when they may be in a higher tax bracket.
Here’s how a Roth IRA differs from a traditional IRA:
- Traditional IRAs let you invest tax-deferred money to be taxed upon withdrawal. You can deduct pre-tax contributions on your tax return.
- Roth IRAs let you invest money that has already been taxed to avoid it later on. Certain qualified withdrawals are tax-free. Contributions are not tax deductible.
Quick Note: Roth IRA contribution limits for 2022 are $6,000 per year (or $7,000 per year for people ages 50 and older).
To open a Roth IRA, taxpayers should find a financial institution that offers the account type. You can rollover assets from existing Roth accounts penalty-free or open a Roth IRA in addition to other accounts.
Advantages of Roth IRAs for individual investors
Some advantages that are unique to this type of retirement plan include:
- Retirees can continue contributing to Roth IRAs for their entire life, according to the Internal Revenue Service (IRS). Traditional IRAs have a maximum contribution age at 70.5 years old.
- There are no required minimum distributions (RMDs), so your heirs can inherit any unused money in your Roth IRA tax-free and cash it out within 10 years.
- Certain qualified distributions are tax free. This includes qualified charitable distributions (QCDs), qualified disaster distributions, distributions for eligible first-time home purchases, and more.
Eligibility requirements for Roth IRAs
Anyone with US earned income below a certain threshold is eligible to contribute up to the maximum annual contribution in a Roth IRA. Modified adjusted gross income (MAGI) limits for Roth IRA contributions for the 2022 tax year are:
- Single filers or heads of household: $129,000 for the full contribution amount, $144,000 for a reduced contribution amount
- Married filing jointly: $204,000 for the full contribution amount, $214,000 for a reduced contribution amount
Do you make too much money for your filing status to contribute to a Roth IRA?
Supplement your 401(k) or other retirement accounts with a long-term investment portfolio instead. The Public.com investing app lets you immediately deposit funds to start your retirement savings journey ASAP. And the social-forward app informs your investing strategy through community discussions—so you’re never investing in the dark.
Roth IRA + supplemental retirement savings investment options
In a Roth IRA, you can invest after-tax dollars in:
- Mutual funds
- Exchange traded funds (ETFs)
- Stocks
- Bonds
- Certificates of deposit (CDs)
- Money market funds
- Cryptocurrency (depending on the account holder’s brokerage account)
In addition to a Roth IRA (coming soon), you can invest in stocks, ETFs, and crypto in a long-term portfolio on the Public app. This feature lets you lock in investments for growth over years or even decades, potentially helping you achieve early or profitable retirement.
Bottom line
A Roth IRA allows your retirement savings to experience tax-free growth, and that’s just one of the tax benefits. Knowing your options—Roth IRA or otherwise—is step one in building wealth that lasts.
What will your portfolio look like when you retire?
Take control of it now. Invest in a long-term portfolio on the Public app to supplement your tax-advantaged retirement savings accounts.
FAQs
What is the difference between a Roth IRA and 401(k)?
A Roth IRA account generally has more investment options than a 401(k). It does have a lower contribution limit than a 401k but comes with more flexibility to work around an early withdrawal penalty.
What happens if I have a Roth IRA, but in a particular year my income exceeds the income limit?
If your taxable income exceeds the income limit for Roth IRA contributions, you will have a lower contribution limit or be unable to contribute to a Roth IRA for that year.
What is the five-year holding period rule for Roth IRAs?
The five-year holding period rule for Roth IRAs says you have to wait at least five years after your first contribution to withdraw any tax-free retirement income.
When do I pay taxes in a Roth IRA?
You pay income taxes before contributing money to a Roth IRA.