Roth IRA: A Tax-Efficient Retirement Savings Account

Jo Willetts, EA

Director, Tax Resources

Published on: June 01, 2023

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Looking for a tax-smart way to save for retirement? Then it’s time to learn the benefits of a Roth IRA, where your money can grow tax free.

What is a Roth IRA? 

A Roth IRA, or individual retirement account, is an investment account that allows your savings to grow tax free, to help you save more for retirement. Distributions from a Roth IRA are generally tax free.

Because you don’t pay tax on any earnings in a Roth IRA, your savings has the potential to grow more than it would if it were taxed. Once you reach age 59½ you can withdraw your money, including the savings, without having to pay taxes on it, giving you a source of tax-free retirement income.

Advantages of a Roth IRA 

The main advantage of a Roth IRA is that it can deliver tax benefits while helping you save more money for retirement. More specifically:

Your investments can grow tax free. You don’t pay taxes on any earnings from your Roth IRA contributions. This can help your savings grow more than it would if you were paying taxes along the way.
Roth IRA withdrawals are tax free. You don’t pay taxes when you withdraw your money, as long as the money has been in the account for at least five years, and you are age 59½ or older or qualify for specific IRS exemptions outlined in IRS Publication 590B.
You can invest your money how you want. The IRS lets you invest your money in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and even CDs and cash.
Most people qualify. You can contribute to a Roth IRA as long as you earn less than the $153,000 IRS income limit for single filers ($228,000 if married filing jointly) in 2023. To see if you qualify, refer to IRS Publication 590B or speak with a Jackson Hewitt Tax Pro.
You still have access to your money. At any time, you can withdraw an amount equal to your contributions (not the earnings) without owing taxes on it or facing an early-withdrawal penalty.
You can use the money for a new home before you retire. While the Roth IRA is intended for retirement savings, you are allowed to withdraw earnings penalty free for many reasons, such as buying a home. If you, or a family member, meet the IRS qualification for a first-time homebuyer, you could be eligible for a tax-free distribution of up to $10,000. If you withdraw earnings for other reasons before age 59½, you may have to pay an additional 10% tax on the amount distributed.

Traditional IRA vs. Roth IRA 

A traditional IRA is another type of individual retirement account, with its own unique structure and advantages. Both accounts can help you save for retirement. There are three important differences:

Eligibility. Anyone with earned income may be eligible to make contributions to a traditional or Roth IRA. See “What’s New?” in IRS Publication 590A. There are income limits for Roth IRA contributions, but the traditional IRA only has possible limits on deductible contributions. Taxpayers who are age 73 or older must start (or continue) taking required minimum distributions (RMDs) from their traditional IRAs, even if they are still working. Roth IRAs do not have RMDs.
Tax benefits today. You cannot deduct contributions to a Roth IRA. Therefore, there are no immediate tax benefits. However, you may be able to take a tax deduction for traditional IRA contributions.
Tax benefits in retirement. Withdrawals from a Roth IRA are tax free. Withdrawals from a traditional IRA are fully or partially taxable.

 Is a Roth IRA better than a 401(k)? 

Many people save for retirement in a 401(k) plan. A 401(k) is an employer-sponsored plan that allows you to contribute some of your earnings directly to your account and reduce your taxable wages.

A traditional 401(k) is the most common and familiar type of 401(k). A growing number of employers also offer a Roth 401(k) plan. Like a Roth IRA, you can contribute post-tax income to a Roth 401(k) and your savings can grow tax free. There are additional, important differences between Roth and traditional 401(k)s you should consider if your employer offers both.

	Roth IRA	Traditional 401(k)	Roth 401(k)
Eligibility	Only people with earned income below IRS-defined limits may make contributions to a Roth IRA.	Only available through your employer (if they offer it), regardless of age or income level.	Only available through your employer (if they offer it), regardless of age or income level.
2023 contribution limits	Up to $6,500 if you are under age 50, and an additional $1,000 if you are age 50 or older.	Up to $22,500 if you are under age 50, and an additional $7,500 if you are age 50 or older. Contributions are often deducted directly from your paycheck.	Up to $22,500 if you are under age 50, and an additional $7,500 if you are age 50 or older. Contributions are often deducted directly from your paycheck.
Employer contributions	Not available.	Employers can add up to $43,500 to your 401(k) savings by matching some or all of your contribution. This brings the total allowed contributions up to $66,000 ($73,500 if 50 or older).	Employers can add up to $43,500 to your 401(k) savings by matching some or all of your contribution. This brings the total allowed contributions up to $66,000 ($73,500 if 50 or older).
Tax benefits	Assets in a Roth IRA can grow tax free. Qualified withdrawals are also tax free.	Your contributions to a traditional 401(k) are typically withheld from your taxable income by your employer, effectively reducing your tax burden. Employer contributions are also not added to taxable income when they are made.	Your contributions to a Roth 401(k) are part of your taxable income. Employer contributions are not added to taxable income. Earnings and distributions from a Roth IRA are tax free.
Investment choices	Usually flexible, with access to a wide range of assets.	Usually flexible, but it depends on the plan administrator’s available options.	Usually flexible, but it depends on the plan administrator’s available options.

Who can invest in a Roth IRA? 

Anyone who meets the income limits set by the IRS can contribute to a Roth IRA, although some may not qualify to make a full contribution. The 2023 limits by filing status are:

Filing Status	Income	Eligibility
Single, Head of Household and certain Married Filing Separately taxpayers	Less than $138,000	Full contribution
	$138,000 to < $153,000	Partial contribution
	$153,000 or more	Ineligible
Married Filing Jointly and Qualifying Surviving Spouse taxpayers	Less than $218,000	Full contribution
	$218,000 to < $228,000	Partial contribution
	$228,000 or more	Ineligible

How to open a Roth IRA? 

You can start a Roth IRA at many banks, mutual fund companies, and brokerage firms.

How much money can you contribute to a Roth IRA? 

IRS rules and regulations determine how much you can contribute to IRAs and other types of retirement accounts. The 2023 contribution limit for a Roth IRA is $6,500 if you are under age 50, and up to $7,500 if you are age 50 or older.

Be sure to check the contribution limits every year. The IRS often adjusts them due to inflation.

Can you convert a traditional IRA to a Roth IRA?

Yes. It is possible to convert a traditional IRA to a Roth IRA. It may help reduce your tax burden in retirement since qualified Roth IRA withdrawals are tax free. However, converting a traditional IRA to a Roth IRA can have significant tax implications in the year you convert.

What’s a ‘backdoor Roth IRA?”

A "backdoor Roth IRA” is not actually a type of IRA. It’s a strategy people use to invest in a Roth IRA when their income exceeds the IRS Roth contribution limits. In short, if you make a contribution to a traditional IRA, you can then convert those funds into a Roth IRA. The short-term tax implications can be complex and potentially severe. A Jackson Hewitt Tax Pro can help you understand how a backdoor Roth IRA could affect your taxes.

What happens to a Roth IRA after you pass away?

Although you do not need to withdraw money from your Roth IRA when you are alive, things get more complicated when you pass away. The details depend on who inherits your account. There are several exceptions, but in general:

If your spouse inherits your Roth IRA, your spouse can roll it into their own Roth IRA without paying taxes or facing the requirement for full distribution within 10 years.
Non-spouse beneficiaries (e.g., children and grandchildren) must withdraw all money from the account within 10 years of your passing. Withdrawals will be tax free.

To minimize financial confusion or family conflict, it may be a good idea for you to seek professional advice about designating a beneficiary for your Roth IRA.

Questions? Jackson Hewitt Tax Pros can help you understand how investing in a Roth IRA could affect your annual tax refund or payment.

About the Author

Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.

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