What Is a Roth IRA, and Is It Right for Me?

Senior man with newspaper using laptop

A Roth IRA is an individual retirement account that has a few unique and useful characteristics that set it apart from a traditional IRA. You won't pay tax on money you withdraw at retirement, for example, as long as you meet certain requirements. In many cases, a Roth IRA is a smart retirement savings option for those early in their careers, or who expect to earn more in the future.

There are other factors to consider when looking into a Roth IRA, however: You can't contribute if you earn more than a certain amount in a year, for example. Here's what you need to know about opening a Roth IRA, who it's best for and how to contribute when you're ready.

How a Roth IRA Works

A Roth IRA is a type of investment account, which means the money you contribute is invested in stocks, mutual funds, exchange-traded funds or other vehicles. Your investment earnings grow as the market grows, or shrink as the market shrinks. (Your account can also include less risky choices such as cash and bonds, which don't have the same potential for growth.)

You'll open a Roth IRA with a bank, credit union or brokerage that will host the account, and you'll choose the type of investments you want to make. Some Roth IRA providers can help you pick investments based on your age and risk tolerance: They may recommend investing more heavily in stocks, for instance, if you're a younger investor who has time to ride out ups and downs in the stock market before retirement.

Contribution and Income Limits for a Roth IRA

While there are many benefits of a Roth IRA, you're limited in the amount you can save in this type of account—and particularly high earners are locked out of contributing altogether. Here are the contribution limits for 2021:

  • You can put up to $6,000 ($7,000 if you're 50 or older) into a Roth IRA. That's substantially less than the $19,500 maximum annual contribution allowed in a 401(k) workplace retirement account.
  • The amount you contribute to a Roth IRA in a single year cannot be more than the amount of earned income (wages, tips and other compensation) you report on your tax return for that year.

There are also limitations on who can participate in a Roth IRA, and they're based on your modified adjusted gross income (MAGI). For most people, this is very close to the adjusted gross income reported on federal income tax returns. These are the Roth IRA contribution limits for 2021 by tax filing status:

  • Single, head of household or married filing separately (and living separately from your spouse): You can contribute the maximum annual amount to a Roth IRA if you earn $125,000 or less; a reduced amount if you earn between $125,000 and $140,000; and none if you earn more than $140,000 per year.
  • Married filing separately (and living with your spouse at any point in the year): You can contribute a reduced amount to a Roth IRA if you earn less than $10,000, and none if you earn more than $10,000 per year.
  • Married filing jointly or qualifying widow(er): You can contribute the maximum annual amount to a Roth IRA if you earn $198,000 or less; a reduced amount if you earn between $198,000 and $208,000; and none if you earn more than $208,000 per year.

What Is the Difference Between a Roth IRA and a Traditional IRA?

There are two types of IRAs to choose from: Roth and traditional. The primary differences are that Roth IRAs have income limits, traditional IRAs require withdrawals starting at age 70½, and you'll pay income tax on withdrawals from traditional IRAs in retirement. Explore more differences in the table below.

Roth IRA vs. Traditional IRA
Roth IRATraditional IRA
Maximum annual contribution (2021)$6,000 ($7,000 if age 50 or over by end of year). This is the maximum allowed across all IRAs.$6,000 ($7,000 if age 50 or over by end of year). This is the maximum allowed across all IRAs.
Maximum income allowance (2021)$140,000 for individuals filing as single; $208,000 for married couples filing jointlyNone
Are contributions tax-deductible?NoMaybe, depending on your income and whether you have a retirement plan at work
Is withdrawal of contributions subject to income tax?NoYes
Is withdrawal of fund earnings subject to income tax?Maybe, if withdrawals are made before age 59½Yes
Is there an early withdrawal penalty?Some withdrawals of fund earnings made before age 59½ are subject to 10% penalty10% penalty on some withdrawals made before age 59½
Age restriction on making contributionsNone70½
Age when distributions become mandatoryNone70½

What Are the Benefits of a Roth IRA?

There's a reason why you may have heard that it's a good idea to save in a Roth IRA. These accounts have many special benefits that make them a worthwhile retirement savings option. Here are the top advantages of a Roth IRA:

  • Post-tax contributions: In a Roth IRA, you pay tax on contributions the year you save in the account. That means you can't deduct contributions from your tax return, but when you withdraw the funds, that money won't be taxable as income—as long as your Roth IRA has been open for at least five years.
  • Useful for younger earners: Roth IRAs can be especially beneficial to people just starting in their careers, when their incomes—and income tax rates—are lower than they may be later on.
  • Account can be opened on behalf of a spouse or child: There is no minimum eligibility age for a Roth IRA owner, so contributions made while your child is young can grow tremendously over a lifetime. To qualify, the child must have earned income, such as wages and tips from part-time jobs. The child may have to file taxes each year Roth IRA contributions are made for them.
  • Account can have multiple beneficiaries: A Roth IRA also can be used to pass wealth to heirs, as you can name multiple beneficiaries to your account. Beneficiaries must take required minimum distributions from the account after your death, but younger beneficiaries can take smaller distributions over a longer time period—allowing funds in the account to continue tax-advantaged growth.

How to Open a Roth IRA

You can open a Roth IRA at a bank, credit union or brokerage. Investment options and fees vary widely from plan to plan, so study the options carefully. Ideally, set up automatic transfers from your checking account to the Roth IRA, perhaps once per month. It may be helpful to contribute a percentage of your income so you can scale it easily as your pay increases.

Consider these factors when shopping for a Roth IRA:

  • Fees: You can find plenty of Roth IRA plans that don't charge anything to open an account. Check the plan's management or per-trade fees too.
  • Degree of fund management: Fund management options run the gamut from no-frills, do-it-yourself discount brokerages to accounts actively managed by experts (who may command high fees). Make sure the account type you choose matches your style of investing.
  • Minimum opening balances and fund balances: Some Roth IRAs require a minimum opening deposit that may be larger than the amount of your regular contribution. Some mutual funds and other investment vehicles available through Roth IRAs also require minimum fund balances, or "buy-in" amounts. Choosing a fund with a sizable fund balance could delay any investment returns until you accumulate enough contributions to buy in.

These options can be confusing, but staff at institutions that offer Roth IRAs should be able to guide you through the process.

Choosing a Roth IRA

There are many retirement savings options to consider, and you're already on the right track by looking closely at each of them. But thanks to a Roth IRA's tax advantages and flexibility in distribution timing, it's a smart choice for many—even if it's in addition to a workplace-sponsored 401(k).

Committing to saving for the future may be the hardest part, though the younger you start, the more you can accumulate for your retirement. Once you've decided to prioritize your retirement, setting the money aside will soon become a habit you won't want to give up.

The purpose of this question submission tool is to provide general education on credit reporting. The Ask Experian team cannot respond to each question individually. However, if your question is of interest to a wide audience of consumers, the Experian team may include it in a future post and may also share responses in its social media outreach. If you have a question, others likely have the same question, too. By sharing your questions and our answers, we can help others as well.

Personal credit report disputes cannot be submitted through Ask Experian. To dispute information in your personal credit report, simply follow the instructions provided with it. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.

To submit a dispute online visit Experian's Dispute Center. If you have a current copy of your personal credit report, simply enter the report number where indicated, and follow the instructions provided. If you do not have a current personal report, Experian will provide a free copy when you submit the information requested. Additionally, you may obtain a free copy of your report once a week through April 2022 at AnnualCreditReport.