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What is a Roth IRA?
A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules dictate that as long as you've owned your account for 5 years* and you're age 59½ or older, you can withdraw your money when you want to and you won't owe any federal taxes.**
Other Roth IRA advantages
Required minimum distributions (RMDs)
Under federal tax law, most owners of IRAs (except Roth IRAs) must withdraw part of their tax-deferred savings each year, starting at age 72 (age 70½ if you attained age 70½ before 2020). If you withdraw less than your RMD, you may owe a 50% penalty tax on the difference. RMDs are intended to ensure that the assets in these types of accounts are eventually subject to taxation.
Some things to think about
Nondeductible contributions Roth IRA contributions are never tax-deductible.
Income restrictions Contributions may be limited by how much you earn—your modified adjusted gross income (MAGI) must be less than the annual limit set by the IRS.
Modified adjusted gross income (MAGI)
An amount used to determine a taxpayer's IRA eligibility. Generally, it's the taxpayer's adjusted gross income calculated without certain deductions and exclusions.
Is your income OK for a Roth IRA?
If your income is too high for a Roth IRA, you could get to a Roth through the "back door."
To use this strategy, you'd start by placing your contribution in a traditional IRA—which has no income limits. Then, you'd move the money into a Roth IRA using a Roth conversion.
But make sure you understand the tax consequences before using this strategy because a Roth conversion is permanent—the contribution can't be moved back to a traditional IRA.
The sooner, the better
The younger you are when you open your IRA, the greater your saving potential because you get that tax-free compounding clock ticking longer for you.
Compounding
The snowball effect that happens when your earnings generate even more earnings, not only on your original investments, but also on any interest, dividends, and capital gains that accumulate. That means that your "money makes money" and can grow faster over time.
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New to Vanguard or looking to consolidate your savings?
Already a Vanguard client? Log in to view your account.
*The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately.
**If you inherit a Roth IRA, you must take RMDs, but they're tax-free as long as the original account owner held the account for at least 5 years.
**When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
You may wish to consult a tax advisor about your situation.
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.
Vanguard's advice services are provided by Vanguard Advisers, Inc. ("VAI"), a registered investment advisor, or by Vanguard National Trust Company ("VNTC"), a federally chartered, limited-purpose trust company.
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure here for an overview.
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