Yes, you can invest in a Roth IRA if your income is below the IRS limit for your filing status

A Roth IRA is a retirement account where you contribute money that has already been taxed, and then your investments grow tax-free. When you withdraw money in retirement, you pay no taxes on those earnings. The catch is that the IRS sets income limits — if you earn above a certain amount, you cannot contribute to a Roth IRA that year, though you may still be able to use other strategies.

The income limits change each year and depend on whether you file taxes as single, married filing jointly, or married filing separately. For 2024, if you are single, your ability to contribute phases out between $146,000 and $161,000 of modified adjusted gross income. If you are married filing jointly, the phase-out range is $230,000 to $240,000. If you are married filing separately, the limit is much lower — between $0 and $10,000. These numbers shift annually, so you will need to check the current year's limits when you are ready to open an account.

Key Takeaways

  • You can open a Roth IRA at most banks and investment firms, and you can invest the money in stocks, bonds, mutual funds, or other securities depending on what the institution offers.
  • Your income must fall below the IRS limit for your filing status in the year you contribute, or you cannot add money to the account that year.
  • You can contribute up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older, but only if you have earned income from a job or self-employment.
  • If your income exceeds the limit, a backdoor Roth conversion may allow you to fund a Roth IRA through a different method, though this involves specific steps and tax rules.
  • You can withdraw your contributions (the money you put in) at any time without penalty, but earnings cannot be withdrawn tax-free until you are 59½ and have held the account for at least five years.

Where to open a Roth IRA and what you can invest in

You can open a Roth IRA at any bank, credit union, brokerage firm, or investment company that offers them. Common places include Fidelity, Vanguard, Charles Schwab, and most traditional banks. When you open the account, you will choose how to invest the money you contribute. The options depend on the institution — some offer only mutual funds and target-date funds, while brokerages let you buy individual stocks, bonds, exchange-traded funds (ETFs), and other securities.

You do not have to invest the money immediately. You can open a Roth IRA and leave the money in a cash sweep account or money market fund while you decide. However, money sitting in cash does not grow much, so most people move it into investments within a few weeks. The institution will walk you through the investment choices when you open the account, and you can change your investments later without penalty.

Income limits and how they affect your ability to contribute

The IRS uses modified adjusted gross income (MAGI) to determine whether you can contribute to a Roth IRA. MAGI is roughly your total income before deductions, though the exact calculation varies depending on your situation. If your MAGI falls within the phase-out range for your filing status, you can contribute a reduced amount. If it exceeds the upper limit, you cannot contribute at all that year.

For example, if you are single and your MAGI is $155,000 in 2024, you fall in the middle of the phase-out range ($146,000 to $161,000), so you can contribute a partial amount — not the full $7,000. If your MAGI is $162,000, you exceed the limit and cannot contribute to a Roth IRA that year through the normal route. You will need to check your tax return or speak with a tax professional to calculate your MAGI, since it is not the same as your gross income from your W-2 or 1099.

Contribution limits and earned income requirements

The IRS caps how much you can contribute to a Roth IRA each year. For 2024, the limit is $7,000 if you are under 50 years old, or $8,000 if you are 50 or older (the extra $1,000 is called a catch-up contribution). These limits apply to all your IRA accounts combined — if you have both a Roth IRA and a traditional IRA, your total contributions to both cannot exceed the annual limit.

You can only contribute money you actually earned from work. This means income from a job, self-employment, or freelance work. Income from investments, rental property, or Social Security does not count. If you are married and one spouse does not work, the working spouse can contribute to a spousal Roth IRA on behalf of the non-working spouse, as long as the couple's combined income is below the limit. The contribution deadline is usually April 15 of the following year, though you can contribute earlier in the year if you want.

What happens if your income exceeds the Roth IRA limit

If your income is too high to contribute directly to a Roth IRA, you may be able to use a backdoor Roth conversion. This involves contributing money to a traditional IRA (which has no income limit) and then converting it to a Roth IRA. The conversion is taxable in the year you do it, so you will owe taxes on any earnings the money made while it sat in the traditional IRA. This strategy works best if you have little or no money already in traditional IRAs, because the IRS taxes all your traditional IRA money as one pool when you convert.

A backdoor Roth requires careful record-keeping and coordination with your tax return, so most people work with a tax professional or financial advisor to execute it correctly. Another option is a mega backdoor Roth, which involves contributing to an employer's 401(k) plan and then converting it to a Roth IRA, but this only works if your employer's plan allows it. If neither option is available to you, you can still save for retirement using a traditional IRA or a taxable brokerage account, though those have different tax treatment.

Withdrawal rules: contributions versus earnings

One of the main advantages of a Roth IRA is that you can withdraw your contributions (the money you put in) at any time without penalty or taxes. This is different from a traditional IRA, where withdrawals before age 59½ usually trigger a 10% penalty. If you contributed $5,000 to your Roth IRA and it grew to $6,000, you can withdraw the $5,000 anytime, but the $1,000 in earnings is subject to the withdrawal rules.

Earnings in a Roth IRA can be withdrawn tax-free only if you are 59½ or older and have held the account for at least five years. If you withdraw earnings before meeting both conditions, you will owe income tax on the earnings plus a 10% penalty. There are a few exceptions — you can withdraw earnings penalty-free (though not tax-free) if you use the money for a first home purchase, disability, or medical expenses, but these exceptions are narrow and have specific requirements. The five-year rule applies to each Roth IRA conversion separately, so if you do a backdoor Roth, that conversion has its own five-year clock.

Required minimum distributions and other rules

Unlike a traditional IRA, a Roth IRA has no required minimum distributions (RMDs) during your lifetime. This means you do not have to withdraw money at any age, and your account can keep growing tax-free for as long as you live. This makes a Roth IRA useful if you want to leave money to heirs, since they inherit the account tax-free (though they do have to withdraw it within ten years under current rules).

You can also continue to contribute to a Roth IRA as long as you have earned income, even after age 70½. This is different from a traditional IRA, where you cannot contribute after age 73. If you are still working and your income is below the limit, you can keep adding money to your Roth IRA indefinitely. This flexibility makes a Roth IRA attractive for people who work longer or want to maximize their retirement savings.

Frequently Asked Questions

Can I have both a Roth IRA and a traditional IRA at the same time?

Yes, you can have both accounts, but your total contributions to all IRAs combined cannot exceed the annual limit. If you contribute $4,000 to a Roth IRA one year, you can only contribute $3,000 to a traditional IRA that same year (assuming the limit is $7,000). The accounts are separate, but the contribution limit applies across all of them.

What if I contribute to a Roth IRA and then my income goes up?

If your income exceeds the limit after you have already contributed, you cannot undo the contribution. However, you can withdraw it before your tax return is due (usually April 15 of the following year) and avoid penalties. If you do not withdraw it, you may owe a 6% penalty tax on the excess contribution each year it sits in the account, so it is important to fix this quickly if it happens.

Can I invest in real estate or cryptocurrency in a Roth IRA?

Most Roth IRAs at banks and brokerages do not allow real estate or cryptocurrency directly. However, some specialized custodians offer self-directed Roth IRAs that do allow these investments, though they charge higher fees and require more paperwork. Before opening a self-directed account, understand the rules — certain investments like life insurance and collectibles are prohibited in all IRAs, regardless of the custodian.

Do I have to report my Roth IRA on my tax return?

You do not have to report contributions to a Roth IRA on your federal tax return, since you are using after-tax money. However, if you do a backdoor Roth conversion, you must file Form 8606 to report it. If you withdraw earnings before age 59½, you will report that on your return and may owe taxes and penalties. Check with a tax professional about your specific situation.