How do Roth IRAs work?
Now that you know the answer to the question "What is a Roth IRA account?" you might be wondering exactly how this type of account works. As long as you meet the income limits, you can contribute to a Roth IRA. And you can continue contributing to your employer's 401(k) account too, if you have one. You can open a Roth IRA via most brokerages, either online or in-person.
Roth IRA contributions and limits
In 2020, people under 50 years old can contribute up to $6,000 to a Roth IRA account. If you're 50 or older, you can contribute up to $7,000. A 25-year-old who opens a Roth IRA and maxes out their contributions this year and every year going forward would have more than $1 million in their account by the time they're 66 years old.
If you're single and you make $124,000 or more, the amount you can contribute is reduced; if you make more than $139,000, you're ineligible for a Roth IRA account. For married couples, the reduced contribution takes effect if their combined income ranges from $196,000 to $206,000.
Once you've made an initial deposit, you'll need to choose which investments to purchase. If you're saving for retirement, it's wise to buy a well-diversified mix of stocks and bonds that reflects your time until retirement and risk tolerance. If you're not sure where to invest your money, an investment advisor can help you. You can also invest your money in a target-date fund, which automatically adjusts its stock and bond holdings over time.
You can make contributions to your Roth IRA all at once or through multiple deposits over the course of the year. If you opt for the latter route, set up automatic contributions to ensure you're putting money into the account on a regular basis. Keep in mind that contributions made through next year's tax deadline count toward the current year's contribution.