What is a Roth IRA?
Open a Roth IRA and take advantage of after-tax benefits as you save for retirement.
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years. Other advantages of having a Roth IRA include:
- No contribution age restrictions. You can contribute at any age as long as you have a qualifying earned income.
- No Required Minimum Distributions (RMDs). There are no mandatory withdrawals, allowing your savings to continue to grow even during retirement.
- No income taxes for inherited Roth IRAs. If you pass your Roth IRA onto your heirs, their withdrawals will also be income tax-free.
A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future, making tax-free withdrawals even more advantageous. However, there are income limitations to open a Roth IRA, so not everyone will be eligible for this type of retirement account.
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Roth IRA contribution limits
Roth IRA contribution limits
Is converting to a Roth IRA right for you?
Your eligibility to open a Roth IRA and how much you can contribute is determined by your Modified Adjusted Gross Income (MAGI). If you are a single or joint filer, your maximum contribution starts to reduce at $125,000 and $198,000 for tax year 2021, and $129,000 and $204,000 for tax year 2022, respectively. See which IRAs you're eligible for with our Roth vs. Traditional IRA Calculator.
Compare different retirement accounts and learn their tax benefits and rules with our Roth IRA vs. Traditional IRA infographic.
- How does a Roth IRA work?
With a Roth IRA, you've already paid taxes on the money you invest in your account, so your contributions are considered "post-tax." Any investment gains on those contributions grow tax-free, and withdrawals are tax- and penalty-free if you're at least 59½ years old and have had your account for at least five years.
Unlike 401(k)s and Traditional IRAs, Roth IRAs don't require you to take minimum distributions starting at age 72. And similar to a Traditional IRA, you can avoid the early withdrawal penalty for situations such as:
- Higher education expenses
- First-time home purchases
- Medical expenses
- Disability claims
- Health insurance
- Substantially equal periodic payments
- Involuntary distribution due to an IRS tax levy
- Reservist distributions
- What is the five-year holding period rule for Roth IRAs?
There are two different five-year rules: one for the money you convert and one for the earnings you make on your investments.
Converted funds. Each conversion amount is subject to a five-year holding period, which begins on January 1 of the year in which you made the conversion. If you do a series of conversions over several years, you'll have separate holding periods for each.
If you withdraw funds before the end of the five-year period, you could be subject to a 10% early withdrawal penalty (you may be exempt if you turn 59½ before taking the withdrawal, even if you haven't held the account for the full five years). Once you've satisfied the holding period, you can make withdrawals of converted funds without penalty, even if you're under age 59½.
Earnings. The five-year rule for earnings also begins on January 1 of the year in which you open and contribute (or convert) to your first Roth IRA. However, it doesn't reset each time you make a contribution or open another Roth account.
Withdrawals of any earnings from your Roth IRA investments are tax- and penalty-free if you've satisfied the five-year holding period and you're over age 59½. If you've met the five-year holding period but you're not yet 59½ years old, you'll be subject to a 10% early withdrawal penalty.
Unlike conversions and earnings, contributions to a Roth IRA are not subject to any holding period, so in most cases you can withdraw them without paying taxes or penalties at any time.
- What happens if I have a Roth IRA, but in a particular year my income exceeds the contribution limit?
In any year in which your income exceeds the contribution limit, you won't be able to contribute to your Roth IRA. However, if your income dips in a subsequent year and returns to the acceptable income range, you can resume your Roth contributions. Keep in mind that as of 2010, the IRS removed the income limits for conversion, meaning that you can convert to a Roth IRA regardless of your modified adjusted gross income (MAGI) or your tax-filing status. You can also combine two Roth IRAs—call a Schwab investment professional at 866-855-5635 for assistance, or consult a tax professional for more details.
- If I leave my Roth IRA to my heirs, will they have to pay income taxes when they take withdrawals?
Under current tax law, because you paid the income taxes up front on your contributions, or paid them when you converted, your heirs will not incur any further income tax on the inherited account. The Roth IRA balance is included in your taxable estate for tax purposes, however, just as a Traditional IRA would be.
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This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager. Depending on the type of account you have, there are different rules for withdrawals, penalties, and distributions. Please understand these before opening your account.
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