Roth IRA

Common questions

How does a Roth IRA work?

With a Roth IRA, you've already paid taxes on the money you contribute in your account, so your contributions are considered "post tax." Any investment gains on those contributions grow tax-free, and withdrawals are tax-free and penalty free if you're at least 59½ years old and have had your account for at least five years.

 

Unlike 401(k)s and Traditional IRAs, Roth IRAs don't require you to take minimum distributions starting at age 73. And similar to a Traditional IRA, you can avoid the early withdrawal penalty for situations such as:

• Higher education expenses
• First-time home purchases
• Medical expenses
• Disability claims
• Health insurance
• Substantially equal periodic payments
• Involuntary distribution due to an IRS tax levy
• Reservist distributions

When can I access my account?

Schwab will send you your account number as soon as your application is completed and approved. You can use your account number to log in and manage your account. 

What are the tax benefits?

With this account, your contributions aren't tax deductible—but your earnings grow tax-free, and withdrawals can be made tax-free after five years, provided you are age 59½ or older. 

 

You may be eligible for tax-free withdrawals before age 59½:

• In case of death or disability
• To pay up to $10,000 toward the purchase of a first home
• To pay up to $5,000 toward birth or adoption expenses

While there are no current-year tax benefits, you can contribute to a Roth IRA whatever your age with earned income, and you won't need to take Required Minimum Distributions based on your age.

What kinds of investment choices do I have?

Choose from stocks, bonds, ETFs, mutual funds, CDs, and more. Schwab also offers professional portfolio management solutions that can make investing even easier. As a Schwab client, you can speak with a Schwab investment professional who can help you decide which investments are right for you. Just give us a call at 866-855-5635. We're here and happy to help.

How much can I contribute each year?

You can contribute $6,000 for tax year 2022 and $6,500 for tax year 2023 ($7,000 for tax year 2022 and $7,500 for tax year 2023 if you are at least age 50) or up to 100% of earned income, whichever is less. Income limits apply. 

What are the eligibility requirements to open a Roth IRA?

There are income limitations to opening a Roth IRA account. If you file as a single person and your Modified Adjusted Gross Income (MAGI) is above $144,000 for tax year 2022 and $153,000 for tax year 2023, or if you file jointly and you have a combined MAGI above $214,000 for tax year 2022 and $228,000 for tax year 2023, you may not be eligible to start a Roth IRA. See the Roth IRA contribution limits for more information.

What is the five-year holding period rule for Roth IRAs?

There are two different five-year rules: one for the money you convert and one for the earnings you make on your investments.

 

Converted funds. Each conversion amount is subject to a five-year holding period, which begins on January 1 of the year in which you made the conversion. If you do a series of conversions over several years, you'll have separate holding periods for each.

 

If you withdraw funds before the end of the five-year period, you could be subject to a 10% early withdrawal penalty (you may be exempt if you turn 59½ before taking the withdrawal, even if you haven't held the account for the full five years). Once you've satisfied the holding period, you can make withdrawals of converted funds without penalty, even if you're under age 59½. 

 

Earnings. The five-year rule for earnings also begins on January 1 of the year in which you open and contribute (or convert) to your first Roth IRA. However, it doesn't reset each time you make a contribution or open another Roth account. 

 

Withdrawals of any earnings from your Roth IRA investments are tax-free and penalty free if you've satisfied the five-year holding period and you're age 59½ or older. If you've met the five-year holding period but you're not yet 59½ years old, you'll be subject to a 10% early withdrawal penalty. 

 

Unlike conversions and earnings, contributions to a Roth IRA are not subject to any holding period, so in most cases, you can withdraw them without paying taxes or penalties at any time.

What happens if I have a Roth IRA, but in a particular year, my income exceeds the contribution limit?

In any year in which your income exceeds the contribution limit, you won't be able to contribute to your Roth IRA. However, if your income dips in a subsequent year and returns to the acceptable income range, you can resume your Roth contributions. Keep in mind that as of 2010, the IRS removed the income limits for conversion, meaning that you can convert to a Roth IRA regardless of your Modified Adjusted Gross Income (MAGI) or your tax-filing status. You can also combine two Roth IRAs—call a Schwab investment professional at 866-855-5635 for assistance, or consult a tax professional for more details.

Roth or Traditional IRA—what's the difference?

A key consideration is whether it makes more financial sense to take advantage of immediate tax benefits or enjoy tax-free withdrawals in retirement. With a Traditional IRA, you may get immediate tax benefits, but you'll have to pay ordinary income tax on your contributions and earnings when you take money out in retirement. With a Roth IRA, there are no immediate tax benefits, but contributions and earnings grow tax-free. All withdrawals can be taken out tax-free and penalty free, provided you're age 59½ or older and you have met the minimum account holding period (currently five years).

 

Compare a Roth vs. Traditional IRA

If I leave my Roth IRA to my heirs, will they have to pay income taxes when they take withdrawals?

Under current tax law, because you paid the income taxes upfront on your contributions or paid them when you converted, your heirs will not incur any further income tax on the inherited account. The Roth IRA balance is included in your taxable estate for tax purposes, however, just as a Traditional IRA would be.

Account opening and funding questions

Account opening and funding questions

What if I have accounts elsewhere?

Consolidating all your accounts at Schwab may help you better manage your finances. We can help you every step of the way in bringing your assets over in a tax-efficient manner. Learn how to transfer.

What do I need to open a Roth IRA account?

• Social security number(s)
• Driver's license
• Employer's name and address (if applicable)
• Statement information for any assets or cash you'd like to transfer
• Beneficiary information

How do I open a Roth IRA account?

The easiest way to open a Schwab IRA account is online. You can also get help opening an account by calling us at 866-855-5635 or visiting one of 300 local branches.

The online account application process only takes about 10 minutes. Key steps include:

• Choosing the type of IRA account
• Providing your personal, employment, and financial information
• Selecting specific account features
• Creating login credentials and providing contact information for your account
• Verifying your identity
• Indicating how you'll fund the account

How do I fund my account?

There are multiple ways to fund your new Schwab account:

• Electronic funds transfer (EFT) with Schwab MoneyLink^® to transfer funds or assets from an external account. You may also continually fund your account by setting up auto deposit to transfer funds from your checking account.
• Wire transfer request from another financial institution.
• Check deposit by mail or in person at your local Schwab branch.

Full funding instructions and access to online fund transfer tools will be provided after your account is opened.