How do Roth IRAs work?
Roth IRAs are subject to certain income limits. For instance, if you are married filing jointly or you’re a qualified widow and your modified adjusted gross income is less than $204,000, you can contribute the maximum for 2022. If you’re single and you make less than $129,000, you can also contribute the maximum.
As long as you meet these income limits, you can contribute to a Roth IRA. And if you have one, you can contribute to a workplace retirement account, like a 401(k), and a Roth IRA at the same time. You can open a Roth IRA via most brokerages, online or in person.
Once you’ve made an initial deposit, you’ll need to choose investments. 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. You can also invest your money in a target-date fund, which automatically adjusts its stock and bond holdings to grow more conservative over time. (Just make sure the fund's strategy doesn't overlap with retirement investments you may already have elsewhere.) If you’re not sure where to invest, a financial professional can help you.
Roth IRA contributions and limits
In 2022, you can contribute up to $6,000 to a Roth IRA (or $7,000 if you'll be at least age 50 by year-end). 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.
Even so, if you’re single and earn $129,000 or more, the amount you can contribute is reduced; if you make more than $144,000, you’re ineligible to make a contribution to a Roth IRA entirely. For married filing jointly couples, the reduced contribution takes effect if their combined income ranges from $204,000 to $214,000. If you’re self-employed, you may still qualify to contribute to a Simplified Employee Pension Plan (SEP IRA) even if your income exceeds these limits.
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 this year’s contribution.