Woman doing Roth IRA calculations.

Roth IRA: What It Is, Income Limits And More

Dan Miller6-minute read
May 18, 2021

A Roth IRA can be one of the best avenues for retirement savings, especially for younger people or those with lower incomes. In this article, we’ll go over what a Roth IRA is, how it works, and the income and contribution limits associated with one. We’ll also discuss who a Roth IRA is best for. 

What Is A Roth IRA?

A Roth IRA is a retirement savings account that features tax-free growth. You pay income tax on your money before making your Roth IRA contributions, meaning you can make penalty-free withdrawals in retirement. Contributions to a traditional IRA are tax-deductible, which means that withdrawals after retirement are taxed as income.

The Roth IRA was created in 1997 by legislation named after one of its principal sponsors – Senator William Roth of Delaware.

How Does A Roth IRA Work?

Roth IRA contributions are made after your income has already been taxed, so distributions in retirement are tax-free. Traditional IRAs are taxed as income upon distribution because the funds are tax-deferred when they are deposited into the account. What makes a Roth IRA different are the income limits and contribution limits that are dependent upon your gross income. Roth IRAs can be a great part of a successful retirement plan. 

Who Qualifies For A Roth IRA?

Unlike a traditional IRA, where almost anyone can contribute, the rules for who qualifies for a Roth IRA are dependent on a couple of different factors. First of all, you must have earned income to contribute to an IRA. Additionally, there are income limits for contributing to a Roth IRA. These income limits are based on your modified adjusted gross income, and depend on your tax filing status. For all tax filing statuses, there is a “soft” income level where your ability to contribute to a Roth IRA is phased out and then a “hard” income level, where anyone making above that limit does not qualify.

Income Limits For A Roth IRA

The Roth IRA income limits are different from traditional IRAs that has no income limits. With a Roth IRA, your adjusted gross income has a direct impact on your eligibility. In 2021, Roth IRA income limits are $198,000 - $208,000 for married filing jointly, $125,000 - $140,000 if you’re filing as single or head of household, and less than $10,000 if you’re married filing separately.

The income limits for a Roth IRA come as a range of incomes. For example, if you file as married filing jointly, then if your income is below $198,000 you are able to make a full contribution to a Roth IRA. If your income is over $208,000 then you are not eligible, and if your income falls between these two amounts, you will be eligible for a partial contribution.

If your income is above these levels, you are ineligible to contribute to a Roth IRA directly. However, you may be able to do what is called a “backdoor IRA” to contribute to a Roth IRA indirectly. There is no official “backdoor IRA” – instead, you make a nondeductible contribution to a traditional IRA and then instruct your custodian to rollover your traditional IRA to a Roth IRA.

How To Contribute To A Roth IRA

As we mentioned earlier, you must have EARNED income in order to contribute to a Roth IRA as part of your retirement savings. Unearned income, such as funds from real estate or investments, does not count as earned income. One way to get earned income is to work for someone else to receive money in such forms as salary, tips, commissions and bonuses. The other way to have earned income that is eligible for contribution to a Roth IRA is to run your own business (or farm). 

Another important thing to keep in mind about how a Roth IRA works is what is called a spousal Roth IRA. A spousal Roth IRA isn’t a separate type of IRA nor is it a joint account. It’s just shorthand for the fact that there is an exception for married couples to the earned income requirement. If one spouse has enough earned income for both spouses, then that person and the nonworking spouse can BOTH contribute to individual Roth IRAs, subject to the income limits for a Roth IRA.

2021 Roth IRA Contribution Limits

The Roth IRA contribution limits typically are adjusted each year for inflation. Contribution limits for 2021 are as follows:

2021 Income Limits For A Roth IRA

Tax Filing Status Income Range
Single $125,000 - $140,000
Married, filing jointly $198,000 - $208,000
Married, filing separately $0 - <$10,000

How To Open A Roth IRA

If you’re looking for how to open a Roth IRA, first make sure you meet the eligibility requirements and contribution limits mentioned above. Many different brokerages offer both traditional and Roth IRA accounts. You have several different options for Roth IRA retirement savings, whether you would prefer a do-it-yourself approach where you buy your own stocks and mutual funds, a robo-advisor, or a full-service brokerage. Simply open a Roth IRA account at the brokerage of your choice. You will need to provide proof of identity, funding information as well as some Roth IRA-specific documents such as an IRA disclosure statement, IRA adoption agreement and a plan document.

Withdrawing From A Roth IRA

The rules are different for withdrawing from a Roth IRA depending on whether you’re talking about withdrawing your original Roth IRA contributions or any investment earnings on your contributions. You are always allowed to withdraw your original contributions without tax or penalty. There is no stipulation or required reason – remember that your original money is contributed with AFTER-tax income, so you’ve already paid tax on those original contributions.

Generally, you can withdraw your Roth IRA earnings if you meet the following guidelines:

  • You are at least 59½ years old; and
  • It has been at least 5 years since you first contributed to any Roth IRA 

That second bullet point is known as the “5-year rule” and applies to all Roth IRA accounts regardless of the account owner’s age. If you start a Roth IRA when you are 56 years old, then you still must wait 5 years (until you are 61) to withdraw any Roth IRA earnings without penalty. If you do not meet these criteria, then you have to pay taxes on your earnings plus a 10% penalty.

However, if you are younger than 59½ years old, there are a few exceptions that may allow you to withdraw earnings: 

  • You have reached age 59½.
  • You’re totally and permanently disabled.
  • You’re the beneficiary of a deceased IRA owner.
  • You use the distribution to buy, build, or rebuild a first home.
  • The distributions are part of a series of substantially equal payments.
  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
  • You’re paying medical insurance premiums during a period of unemployment.
  • The distributions aren't more than your qualified higher education expenses.
  • The distribution is due to an IRS levy of the qualified plan.
  • The distribution is a qualified reservist distribution.

If it has been 5 years since you opened your Roth IRA and you meet one of these exception criteria, then you will not be charged tax or the 10% penalty. If it has not been 5 years since you opened your Roth IRA and you qualify under one of these exceptions, then you will not be charged the 10% penalty, but you will still owe income tax on your earnings. Your contributions, as always, were already taxed before they were contributed, so they do not accrue income tax when they are withdrawn.

You are considered a first-time homebuyer if you (and your spouse) have not owned a home in the past 2 years.

Unlike a traditional IRA, a Roth IRA does not have required minimum distributions at any age. In a traditional IRA, you are generally required to withdraw money at age 70½, but in a Roth IRA, there is no such requirement. However. if you pass away, then your beneficiaries may be required to make minimum withdrawals from an inherited Roth IRA.

Benefits Of A Roth IRA

Roth IRAs offer great benefits for retirement savings, especially if you are younger and in a lower tax bracket. While you can’t AVOID paying income tax, you can lower your overall tax liability by paying income tax on your money now instead of paying taxes (at a possibly higher rate) when you withdraw your money. And since Roth IRA contributions are always able to be withdrawn without any additional tax or penalty, you have the flexibility to still be able to access much of your money should life take an unexpected turn.

Roth IRA Tax Benefits

The biggest Roth IRA Tax benefit is that you can pay income taxes on your contributions now, when you are in a lower income tax bracket than you might expect to be in when you look to retire. Then your earnings grow tax-free until you reach age 59½ and can withdraw your money completely income-tax-free. If you have always wondered about Roth IRAs and are eligible under the income and contribution limits, it’s certainly something you should consider for your retirement savings.

Roth IRA Flexibility

Another great feature of the Roth IRA is its flexibility. Because your Roth IRA contributions can always be withdrawn without tax or penalty, you can have the peace of mind that you can always access that money. While you should endeavor to keep the money in place in your Roth IRA as retirement savings, if something comes up and you end up needing that money, you always have tax-free access to your contributions. Additionally, the Roth IRA has several exceptions to what makes a qualified distribution that are tailor-made for some of the large purchases that may come up in your early adult life, such as money to purchase a first-time home and qualified education expenses.

Dan Miller

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free/cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.