Are You Falling for These 3 Roth IRA Myths?

Key Points

• It's possible to withdraw funds contributed to an IRA without paying taxes -- even if the account has been open for less than five years.

• You can open as many retirement accounts as you'd like, even if your employer offers a plan of its own.

• If you want to invest in a Roth IRA but earn too much money, there's an easy workaround.

• The $23,760 Social Security bonus most retirees completely overlook ›

A Roth IRA (Individual Retirement Account) allows you to invest after-tax dollars, meaning you pay taxes on the money before it's invested. The primary advantage is that you don't have to pay taxes on the funds when you withdraw them in retirement, even though they've enjoyed years of tax-free growth.

Although Roth IRAs come with a slew of benefits, like never being required to take minimum distributions during your lifetime, they're also surrounded by a handful of silly myths. Here are three of them.

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Myth No. 1: Roth IRAs must be open for five years before you're eligible to withdraw any money tax-free

The reality: It's easy to see how someone might come to believe this myth, mainly because there are two sets of rules: One for those age 59 1/2 and over, and the other for those under 59 1/2. Here's a breakdown:

Age 59 1/2 and over

If you're making a withdrawal from a Roth IRA you've had for less than five years, money you contributed to the account (and already paid taxes on) will not be subject to taxes or penalties. However, earnings are subject to taxes (but not penalties).

Under 59 1/2

You're free to withdraw contributions tax- and penalty-free. However, you may have to pay taxes and penalties on any earnings you withdraw from the account. You may be able to avoid penalties on those earnings (but not taxes) if you use the withdrawal to:

• Pay for a first-time home purchase (up to $10,000).
• Pay for qualified education expenses.
• Cover certain emergency expenses.
• Pay qualified expenses related to birth or adoption.
• Pay unreimbursed medical expenses.
• Pay for health insurance if you're unemployed.
• Cover an IRS levy.
• Pay expenses due to a federally qualified disaster.

Penalty-free withdrawals may also be permitted if you become disabled, pass away, or are a survivor of domestic abuse.

Note: For tax and penalty purposes, your earnings are not considered withdrawn until you've withdrawn all contributions.

Myth No. 2: You can't contribute to a Roth IRA if you have a retirement plan through your employer

The reality: There's no rule saying you can't invest in multiple retirement accounts, even if your employer offers a plan. Investing in different account types can be a strategic way to handle taxes in retirement. Ultimately, mixing and matching accounts offers you greater control over how you pay taxes throughout your golden years. Here are some of the reasons you may want to take advantage of different types of retirement plans:

• Traditional IRA or 401(k): Contributions are tax-deferred, meaning you'll owe taxes when you withdraw the money.
• Roth IRA or Roth 401(k): You pay taxes on the money before contributions are made, which makes withdrawals tax-free in retirement.
• Taxable brokerage account: This account offers no tax advantages on your contributions, but long-term capital gains and qualified dividends are taxed favorably.

Finally, when you mix-and-match account types, you don't have to worry as much about future changes to tax laws. Having pre- and post-tax accounts means you won't be at the mercy of a single tax treatment.

Myth No. 3: You earn too much to get money into a Roth IRA

The reality: It's true that direct Roth IRA contributions are subject to income limitations. For example, in 2025, single filers must have a Modified Adjusted Gross Income (MAGI) under $150,000, and joint filers must have a MAGI under $236,000.

However, there is a way to circumvent the income limit. A "backdoor Roth IRA" involves contributing after-tax dollars to a traditional IRA and converting the funds to a Roth. This is an especially useful strategy if you expect to be in a higher tax bracket in retirement. The process is simple.

1. Set up a new traditional IRA: Open a new account at the brokerage or financial institution of your choice.
2. Contribute to the IRA: Make a non-deductible contribution to the traditional IRA (this means you won't get a tax break now). The IRA contribution limit for 2025 is $7,000 ($8,000 if you're 50 or older).
3. Convert the funds to a Roth IRA: Set up a Roth IRA and convert the contribution you previously made to the traditional IRA to the Roth.

When you make a conversion, there are no age or income requirements.

Living on Social Security benefits alone can be challenging, even for the most budget-conscious retiree. While you can, it's a good idea to consider all your options and contribute money to investment accounts you understand and can stick with into retirement.

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