Roth IRA: Understanding contributions, limits, investments & benefits

A Roth IRA is an individual retirement account (IRA) in which you make after-tax contributions towards your retirement. A Roth IRA is a type of retirement account that allows your money to grow tax-free and also allows contributions to be withdrawn tax-free. Earnings can also be withdrawn tax-free under the assumption that you withdraw after age 59½ and your account has been open for at least five years — this is also known as the “five-year rule.” Roth IRAs are similar to traditional IRAs, with the main notable difference being how they are taxed. To read more on the differences between the two, you can turn to our Roth IRA vs. traditional IRA page.

You can maintain your Roth IRA by making contributions from income that has already been taxed. Contributions can be made in different ways, including regular direct transfer contributions, lump-sum contributions, and more. Contributions are limited by the Internal Revenue Service (IRS), which periodically adjusts how much can be contributed annually. The contribution types and limitations will be discussed more in detail below.

Similar to other retirement plans, contributions made to your Roth IRA grow tax-free over time. Roth accounts, however, are more flexible than other retirement accounts, as account holders can maintain their Roth IRA indefinitely, with no required minimum distributions — unlike with traditional IRAs or 401(k)s. You can also withdraw contributions from your Roth account without paying tax penalties at any given time — note that this is different from withdrawing earnings, which could result in taxes and penalties if you withdraw before age 59½ or before meeting the five-year rule.

Contributions are the after-tax money you put into your Roth IRA. While your IRA needs contributions to grow, the IRS has certain rules that must be followed, dictating the limit and type of money you can deposit into your IRA. 

Let’s begin by understanding how contributions are made into a Roth IRA. Contributions are essentially made as cash deposits, which can be done in the following ways: 

• Direct transfers: Moving funds from your checking or savings account directly to your Roth IRA.

• Payroll deductions: Some employers allow automatic contributions to your Roth IRA from your paycheck.

• Lump-sum contributions: Deposit a full amount, up to the IRS limit, at once.

• Recurring contributions: Set up automatic transfers to make regular contributions (monthly, quarterly, etc.).

Contributions can only be made from earned income. This means, if you are working for an employer, you are allowed to contribute to your Roth IRA from your salary, wage, commission, bonuses, or any other amount you are paid from your employer. If you are self-employed, you are allowed to contribute from your net earnings.

While Roth IRAs offer tax-free growth, not all contributions are allowed. Here is an example of what you cannot contribute:  

• Employer contributions: Unlike 401(k)s, employers cannot contribute to your Roth IRA. 

• Required minimum distributions (RMDs): If you take RMDs from other retirement accounts, you cannot reinvest them into a Roth IRA. 

• Inherited IRA funds: In general, you cannot transfer money from an inherited IRA into your Roth IRA.

• Non-earned income: Contributions to your Roth IRA must come from earned income, as explained above. This means you cannot contribute rental income, interest and dividends, pension or annuity benefits, gifts or inheritance.

If you are looking into starting a Roth IRA, it may be important to note that the IRS also sets an annual contribution limit for Roth IRAs. In 2024, this limit was $7,000 if you are under 50, or $8,000 if you are 50 or older — this limit will also remain for 2025.¹ If you are 50+, you can also contribute up to $1,000 in “catch-up contributions,” which is included in the $8,000 limit.² 

This contribution limit is also the same for traditional IRAs, and applies across all IRAs. Therefore, if you have multiple accounts, the total contribution limit applies across all accounts, not per account. 

It is also important to note that you need to meet income eligibility requirements to contribute to a Roth IRA. In order to make full contributions in 2025, your modified adjusted gross income (MAGI) needs to be below $150,000 for single filers, or below $236,000 for married couples filing jointly.³ Having an income above these limits will decrease your contribution limit until you can no longer contribute —  meaning your contribution limit could reach $0 if your income is too high. We will cover complete income thresholds below.

Contributing to your Roth IRA is not the final step in saving towards your retirement. Once you have made contributions to your Roth IRA, you can choose how to put your money to work through different investment and savings options. 

You can choose from investments such as:

• Stocks

• Bonds

• Mutual funds

• Index funds

• Roth IRA CDs

• Exchange-traded funds (ETFs)

• Real estate investment trusts (REITs)

• Certificates of deposit (CDs)

• Money market funds

• Some precious metals

Due to regulatory and tax concerns, you are not allowed to invest in life insurance, collectibles, S Corporations, personal property and real estate, or certain derivatives and alternative assets.

Choosing a diverse range of Roth investment and savings options can help to grow your funds, but it is important to be aware of any potential risk of losses when it comes to saving vs. investing. It is also important to consider which investment options your provider offers. Becoming aware of the risk-reward tradeoffs of investment options, alongside your risk tolerance, can help you make a well-informed decision to grow your funds.

Starting a Roth IRA does not have to be difficult. Roth IRAs can be opened through a bank, credit union, brokerage, loan associations, or other providers like robo-advisors, which have been approved by the IRS to offer IRAs. When starting a Roth IRA, you will need to provide a form of identification (such as a passport or driver's license), proof of employment, and your bank account information. Upon creating an account, you will receive an IRA disclosure statement, along with an IRA adoption agreement and plan document, explaining rules and regulations that need to be followed. These documents also serve as an agreement between the account owner and trustee.

You can open a Roth IRA at any time, however, you do need to ensure that contributions for a tax year are made by the tax-filing deadline — this is usually on April 15th of the following year, but it’s best to double-check to ensure you do not miss the deadline.

There are several types of Roth IRAs to choose from, each designed for different financial situations. Roth IRA investment options can also differ by account. 

These include: 

• Standard Roth IRA: The most common type, available to individuals with earned income below IRS income limits. 

• Spousal Roth IRA: Allows a non-working spouse to contribute to a Roth IRA using their spouse’s earned income. 

• Self-Directed Roth IRA (SDIRA): Offers more investment options, including real estate, private equity, and cryptocurrencies. Requires more hands-on management. These are some examples of alternative investments, which may carry high degrees of risk. It is important to understand the high risk associated with these types of investments before making a decision. 

• Rollover Roth IRA: Created when rolling over funds from another retirement account, like a traditional IRA to Roth IRA conversion. 

• Backdoor Roth IRA: A strategy where high-income earners contribute to a traditional IRA first and then convert it to a Roth IRA. 

You may want to consider your financial and employment situation, alongside your wants and needs for retirement, to see which Roth IRA account would best suit you. 

When starting a Roth IRA, it is also important to do some research on your provider. You may want to look into different provider options to see which one best fits your needs. Some providers offer a plethora of investment options, while others have a more conservative list. This may impact your investment returns, therefore, you should also consider your risk tolerance when choosing a provider for your Roth IRA. 

In general, providers offer the following options: 

• Banks or credit unions: May offer Roth IRAs with savings or CD options. Not all banks offer Roth IRAs, so it is important to check if the option is available. If a bank does not directly offer a Roth IRA, a CD can also be an option for growing your retirement savings. 

• Brokerage firms: Allow you to open a Roth IRA and use contributions to invest in stocks, bonds, ETFs, or mutual funds. 

• Robo-advisors: Provide automated investing options based on your goals and risk tolerance.

If you want to be more hands-on and active with your investments, you may consider an account with lower trading costs. If you prefer a more passive management, you may face higher fees and account minimums. Regardless of what management approach you prefer, you should always check Roth account requirements, as some require high minimum account balances, while others have lower to no minimum account balance. 

If you are looking into how to start a Roth IRA, it is important to understand if you meet the eligibility requirements. In order to be eligible to make Roth IRA contributions, you need to have an earned income that meets modified adjusted gross income (MAGI) and filing status requirements from the IRS. The IRS periodically adjusts MAGI limits, therefore you need to ensure your annual income does not exceed the limit, or you will be ineligible to contribute to your Roth IRA. 

Essentially, to make full contributions, you need to make less than the limit in your appropriate category. For 2025, you could make full contributions to your Roth IRA up to the IRS limit, if your MAGI is below $150,000 for single filers, or below $236,000 for married couples filing jointly² — this is slightly higher from the 2024 limits of $146,000 for single filers and $230,000 for married couples filing jointly.⁴

If your income is above these limits, then your contribution limit will decrease until you lose eligibility.

Eligibility requirements for tax year 2025:^³

Remember, these limits are set by the IRS, so you can check the IRS website periodically for any updates.

When choosing a retirement plan, or if starting a Roth IRA, it is important to consider any benefits and drawbacks of different account types. It is important to consider what each account has to offer, to see what best fits your financial plans and needs for retirement. You can even consider multiple accounts as part of your retirement planning. Let’s take a look at some of the benefits and potential drawbacks of a Roth IRA.

Some of the advantages of a Roth IRA include: 

• No contribution age limitations: If you earned a qualifying income, you can contribute to your Roth IRA regardless of your age. 

• Potential tax-free withdrawals: Since contributions are made with after-tax dollars, qualified withdrawals — meaning those made after age 59½ or after meeting the five-year rule —  are tax-free. 

• No required minimum distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t require you to withdraw money at a certain age, allowing investments to potentially grow tax-free indefinitely. 

• Flexible withdrawals: You can withdraw original contributions penalty and tax-free at any time, which can be helpful in emergencies.

• May benefit estate planning: Roth IRAs are great for estate planning since they can be passed down to heirs tax-free, which can also be a good tool for preserving generational wealth.

Here are some potential drawbacks of a Roth IRA: 

• Income limits for contributions: High earners may be restricted from directly contributing. It is important to check limits, as the IRS can adjust them periodically. 

• No immediate tax deductions: Unlike a traditional IRA, you do not get a tax break for contributions in the current year. 

• Contribution limits: Annual contribution caps — $7,000 in 2024 and 2025, $8,000 if you are 50 or older¹ — may restrict your saving potential. 

• Early withdrawal restrictions on earnings: While you can withdraw contributions penalty-free, withdrawing earnings on investments before age 59½ or the five-year waiting period results in taxes and a 10% penalty.

• Risk of investment loss: Since a Roth IRA is an investment account, the value can fluctuate with the market, meaning there is potential room for losses. Risk of losses may be lesser or greater depending on which investments you choose.

A Roth IRA can be a favorable retirement savings option for those who qualify. It offers tax-free growth, flexible withdrawals, and has no required minimum distributions. Although income limits and contribution caps apply, its long-term tax advantages make it a suitable option for those looking for some more flexibility in their retirement strategy.

If you are just getting started, you could also consider looking into high-interest savings products to help build an initial nest egg before contributing to a Roth IRA or other retirement account. The Raisin marketplace offers various high-yield savings products with competitive interest rates that can help you get started saving towards your retirement funds. Explore savings options with Raisin and start maximizing your retirement funds today.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

Sources

¹https://www.irs.gov/publications/p590a

²https://www.irs.gov/publications/p590a#en_US_2024_publink1000230489

³https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2024