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How does a Roth IRA work?

Contributions are made to a Roth IRA with after-tax dollars. There is no upfront tax break; however if certain requirements are met, the money can be withdrawn tax-free. While the money is in the Roth IRA it grows tax-free.

Check out some of the articles on the Empower (formerly Personal Capital) site for more on the workings of a Roth IRA.

Roth IRA contribution rules and limits

There are annual contribution limits for both traditional and Roth IRAs. The annual limit is combined across all IRA accounts and types, which means if you have one of each account type, you still cannot contribute more than the annual contribution limits.

The IRA contribution limits for 2023 and 2024 are:

Contributions for a given tax year can be made up to the tax filing date, with no extensions. Contributions for the 2023 tax year can be made up to April 15, 2024 and contributions for the 2024 tax year up to April 15, 2025.

In order to contribute to a Roth IRA, your income must be under the income limits for the year.

Who qualifies for a Roth IRA?

In order to be able to contribute to any type of IRA, including a Roth IRA you need to have earned income from employment or self-employment. Interest or investment income and pension income doesn’t count.

The income limits to be able to contribute to a Roth IRA are based on a taxpayer’s modified adjusted gross income (AGI). The income limits for 2023 and 2024 are:

Spousal Roth IRA

In the case of a married couple, a spousal Roth IRA can be opened for a non-working spouse. The couple must file as “married filing jointly” to qualify.

In this case, a married couple could each contribute the maximum to a Roth IRA if so desired. For 2024 this would be $7,000 each, plus an additional $1,000 if either or both are 50 or over. The working spouse must have earned income and each spouse may not contribute more than that earned income amount. The income limitations outlined above will also apply.

Rollovers

Another way to fund a Roth IRA is to roll over a Roth 401(k), Roth 403(b) or other type of Roth account from a workplace retirement plan. This is most often done in association with someone who is leaving that employer to switch jobs, because they are retiring or due to being terminated from employment.

You will want to coordinate the rollover between the IRA custodian who will be receiving the funds and the plan that you are rolling the money over from. There are no income or contribution limits associated with this type of rollover, and there should not be any tax implications.

Roth conversions

A Roth IRA conversion allows you to convert assets held in a traditional IRA, a traditional 401(k) or similar workplace retirement account to a Roth IRA. Taxes will be due on some or all of the amount converted. The advantage here is that this allows the account holder to convert a higher amount than the annual IRA contribution limits. It also allows those who earn too much to contribute to a Roth IRA to still fund a Roth IRA.

Backdoor Roth IRAs

A backdoor Roth IRA involves contributing to a traditional IRA on an after-tax basis and then converting that money to a Roth IRA. This is a way for high earners who cannot contribute directly to a Roth IRA to still fund an account. The amount of the conversion may be tax-free or subject to taxes based on the pro-rata rule. This rule says that the conversion will be taxed based on the ratio of tax-free contributions to pre-tax contributions and account earnings across all traditional IRAs.