Retirement, Investments, & Insurance for Individuals Build your knowledge What is a Roth IRA and how do I use it to save for retirement?

What is a Roth IRA and how do I use it to save for retirement?

Starting and contributing to a Roth IRA offers a key tax advantage and a way to diversify your retirement savings.

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10 min read |

Deciding to save for retirement now could help you have a more secure future. Figuring out how to do it, on the other hand, can be a bit confusing. How do you determine what’s best for you and your goals?

If you're assembling a retirement savings toolbox to build your post-work life, a Roth IRA may help. Here’s how to start a Roth IRA, how much you can contribute to a Roth IRA, and more.

What is a Roth IRA?

Roth individual retirement account (IRA) is an after-tax retirement savings account. Why after tax? You create and add to a Roth IRA with money that’s already been taxed. But that means that both growth and withdrawals when you take a qualified distribution are not taxed.  If you think you might be in a higher tax bracket in retirement, saving in a Roth IRA now may be extra advantageous.

While tax-free withdrawals and growth are great, Roth IRAs offer several other benefits. Those include:

In addition, if you’re married and your spouse isn’t employed or doesn’t make enough to set up a Roth IRA, you can set up a spousal Roth IRA for them.

How can you start a Roth IRA?

It’s key to understand two things before you start a Roth IRA:

  1. You must have earned income—meaning, you must still be employed, either full or part time.
  2. You must be under Roth IRA income limitations set by the IRS.

Roth IRA limits

Income tax filing status: IRS income limitations
Married, filing jointly $218,000
Single, head of household $138,000

How much can you contribute to a Roth IRA?

There are combined contribution limits for both traditional IRAs and Roth IRAs based on your age. Those often change year to year, but for 2023 they are:

  • $6,500 for those under age 50, and
  • $7,500 for those age 50 or older.

Quick guide to a Roth IRA

Taxes: Paid before you contribute; distributions are tax-free

Age restrictions to set up: None

Income limits: Yes (see above)

Contribution limits: $6,500, age 50; $7,500 age 50+

Withdrawals: Not required, but can begin any time after age 59½

When can you take money out of a Roth IRA?

Two important considerations influence when you can withdraw from a Roth IRA:

  1. You must have had the account for more than five years.
  2. You must be at least age 59½.

If you withdraw funds earlier than age 59½ or before the Roth IRA account is five years old, you may face both early withdrawal penalties and taxes. However, unlike 401(k)s, 403(b)s, and traditional IRAs, there’s no required minimum distribution (RMD) once you retire. In fact, you don’t ever have to withdraw money from a Roth IRA.

What's next?

Boosting your retirement contributions, even by 1%, can help build a foundation for long-term retirement account growth. Log in to your Principal account to assess your savings rate. Don’t have an employer-sponsored retirement account? We can help you set up an IRA or a Roth IRA.