Roth IRA contribution rules
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Published 10:56 a.m. UTC Nov. 6, 2023
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Key points
- The Roth IRA contribution limit for 2024 is $7,000, or $8,000 if you’re 50 or older.
- Whether you can contribute the full amount to a Roth IRA depends on your income.
- Some Roth IRA withdrawals trigger taxes and penalties.
The Roth IRA has become a popular retirement savings tool, especially among millennial and Gen Z investors. It’s easy to see why.
Roth IRAs offer powerful tax advantages. The after-tax dollars you contribute to your Roth IRA grow tax-free, and you can generally take tax-free distributions in retirement. As an added bonus, you can withdraw your contributions anytime tax- and penalty-free since you already paid taxes on them.
Investors who are in lower tax brackets now than they expect to be during retirement will benefit most from Roth IRAs. But Roth IRAs aren’t available to everyone. And the IRS limits how much you can contribute to a Roth IRA each year.
Roth IRA income limits
Like many other retirement plans, Roth IRAs have income limits, often referred to as phaseouts.
“The term ‘phaseout’ comes from the fact that you don’t abruptly hit them as your income rises. Rather, when you hit the beginning of the phaseout, your maximum contribution phases out until eventually you are unable to contribute at all due to your income level,” said Mary Orstein, a certified financial planner and the manager of financial planning with PNC Investments.
2024 Roth IRA income limits
Roth IRA contribution limits
Roth IRAs also have annual contribution limits. In 2024, assuming your income does not exceed the limits outlined above, you can contribute the lesser of:
- $7,000, or $8,000 if you’re 50 or older.
- Your taxable compensation for the year.
Note: The IRA contribution limit is the combined limit for both traditional IRAs and Roth IRAs. So, while you can contribute to both accounts, your total contributions cannot exceed $7,000, or $8,000 if you’re 50 or older.
How to time your Roth IRA contributions
You have several options for timing your Roth IRA contributions each year. What makes sense for you may depend on your income and investable assets.
“In my opinion, there is no right or wrong,” said Kendall Meade, a certified financial planner with SoFi. “Many people prefer to make contributions whenever they get paid. By moving it directly when they get paid, they are not tempted to instead spend this money.”
This strategy is an example of dollar-cost averaging, which is the practice of investing a fixed amount on a regular basis.
Another option is making a lump-sum contribution of the entire $7,000 or however much you plan to contribute for the year.
Some data suggests that lump-sum investing outperforms dollar-cost averaging, likely because your money has more time to grow in the market. But not everyone can make such a large contribution to their retirement account at the beginning of each year.
A final consideration is how close you are to the Roth IRA income cap.
“For those who may be very close to the income limit, I recommend waiting until you know your income for the year to contribute,” Meade said. “If you go over, it can be difficult or time-consuming to correct an overcontribution.”
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Additional Roth IRA rules to consider
It’s important to understand the income and contribution limits before using a Roth IRA to save for retirement. But you should also be aware of the rules regarding withdrawals and conversions.
Withdrawal rules
As we mentioned above, you can withdraw your Roth IRA contributions anytime tax- and penalty-free because you have already paid taxes on them. Roth IRAs stand out from other retirement accounts in this way.
You can withdraw your contributions for any reason, from making a major purchase to covering a financial emergency. But doing so isn’t necessarily in your best financial interest.
“Investors should avoid withdrawing funds from Roth IRAs when possible before retirement since it can have a significant negative impact on their retirement savings,” Orstein said. “This negative impact is amplified by potential tax-free growth between the withdrawal and retirement.”
The rules are different for earnings, and they vary based on your age and how long you’ve had the Roth IRA. Generally speaking:
- Withdrawals of earnings must be taken after age 59½.
- Withdrawals of earnings must be taken after a five-year holding period.
If you meet both requirements, you can withdraw your earnings tax- and penalty-free.
If you meet the age requirement but not the five-year requirement, your earnings will be subject to taxes but not penalties.
Withdrawals of earnings before you reach age 59½ and before you have met the five-year rule are generally subject to income taxes and a 10% penalty. Exceptions may help you avoid the penalty but not the taxes. They include:
- Becoming disabled.
- Using the withdrawal for a first-time home purchase (up to $10,000).
- Using the withdrawal for qualified education expenses.
- Using the withdrawal for qualified birth or adoption expenses.
- Using the withdrawal for unreimbursed medical expenses.
- Using the withdrawal for health insurance if you’re unemployed.
- Receiving the withdrawals as a series of substantially equal periodic payments.
Withdrawals of earnings before you reach age 59½ but after you have met the five-year rule are also generally subject to income taxes and a 10% penalty. You may be able to avoid both the taxes and penalty if one of the following exceptions applies:
- The withdrawal is made because you are disabled.
- The withdrawal is made to a beneficiary or your estate after your death.
- The withdrawal is made for a first-time home purchase (up to $10,000).
It’s also worth noting that, unlike some other retirement accounts, Roth IRAs do not have required minimum distributions. Pretax accounts generally require that you start taking withdrawals when you reach age 73. But if you have money in a Roth IRA, you can leave it there for as long as you’d like.
Conversion rules
If your income precludes you from contributing directly to a Roth IRA, you may be able to take advantage of what’s known as a backdoor Roth IRA.
“In the backdoor Roth strategy you contribute the money to a traditional IRA, then immediately convert that to a Roth IRA,” said Meade. “As long as the money has not been invested in the interim, there are no tax consequences.”
You can also convert funds from a pretax account like a traditional IRA or 401(k) after the tax year of the original contribution. But because you already received the tax benefit and have investment earnings, you must pay income taxes on the full amount you convert to the Roth IRA.
A final thing to consider is that the five-year rule is different for converted funds. The five-year period starts at the time of the conversion, not when you make your first contribution, and is separately determined for each conversion.
You can contribute to your Roth IRA anytime throughout the year. In fact, you can contribute up until the income tax filing deadline. But remember that there are income and contribution limits that dictate how much you can save in a Roth IRA.
You can’t contribute directly to a Roth IRA if your income exceeds the limits set by the IRS. But you may be able to use a “backdoor” strategy to contribute to a Roth IRA by first contributing to a traditional IRA and then immediately converting it.
Roth IRA contributions are made with after-tax dollars, meaning you’ve already paid taxes on that money. Your funds grow tax-free, and you generally can take tax-free distributions in retirement. The trade-off is that Roth IRA contributions aren’t tax deductible.
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