Is Acorns a Roth IRA? How It Works for Retirement Investing

Acorns is widely known as a micro-investing app that helps users save and invest spare change, but it also offers retirement accounts like Roth IRAs. A Roth IRA can be a valuable tool for long-term wealth building, particularly for those looking to take advantage of tax-free withdrawals in retirement.

Understanding how Acorns integrates Roth IRAs into its platform can help investors determine if it’s the right choice for their retirement savings.

Acorns Account Setup

Acorns offers Acorns Later, which provides access to tax-advantaged retirement accounts, including Roth IRAs. When signing up, users answer questions about their income, employment status, and retirement goals. Based on their responses, Acorns recommends an IRA type that aligns with their financial situation. While users can override the recommendation, the platform simplifies the process by guiding them toward an appropriate option.

Once the account type is selected, Acorns assigns a diversified portfolio based on the user’s risk tolerance and time horizon. These portfolios are built using exchange-traded funds (ETFs) that provide exposure to stocks and bonds. Acorns follows a passive investment strategy, allocating funds according to modern portfolio theory rather than active stock picking. This approach helps investors maintain a balanced portfolio without requiring hands-on management.

Funding the account is straightforward, with options for recurring contributions or one-time deposits. Acorns also integrates its round-up feature, which invests spare change from everyday purchases. For example, if a user buys coffee for $3.75, Acorns rounds the transaction up to $4.00 and invests the $0.25 difference. Over time, these small contributions accumulate, supplementing regular deposits and helping users grow their retirement savings with minimal effort.

Roth IRA Qualifications

Not everyone is eligible to contribute to a Roth IRA, as the IRS sets income limits based on tax filing status. For 2024, single filers with a modified adjusted gross income (MAGI) of $146,000 or less can contribute the full amount, while contributions phase out between $146,000 and $161,000. Those earning above $161,000 cannot contribute directly. Married couples filing jointly face a phase-out range between $230,000 and $240,000, with full contributions allowed below $230,000.

Income eligibility is determined by MAGI, which includes wages, self-employment earnings, and rental income, with certain deductions and exclusions applied. Individuals exceeding the income limits can still fund a Roth IRA through a backdoor Roth conversion. This involves contributing to a traditional IRA and then converting it to a Roth IRA, though tax implications must be considered, particularly if pre-tax funds are involved.

Contributions must be made with earned income, meaning wages, salaries, or self-employment earnings. Passive income, such as dividends or rental profits, does not qualify. A non-working spouse can contribute based on the working spouse’s income through a spousal Roth IRA, provided they file jointly.

Contribution Limits

The IRS caps Roth IRA contributions to prevent high-income individuals from using these accounts as tax shelters. For 2024, the maximum contribution is $7,000 for individuals under 50. Those aged 50 and older can contribute an additional $1,000 as a catch-up contribution, bringing their total limit to $8,000. These figures are periodically adjusted for inflation.

Unlike 401(k) plans, Roth IRA contributions are made with after-tax dollars and do not reduce taxable income in the year they are made. However, contributions can be made at any time before the annual tax filing deadline, typically April 15 of the following year.

Exceeding the contribution limit can result in a 6% excess contribution penalty for each year the excess remains in the account. To avoid this, the excess amount must be withdrawn or recharacterized to a traditional IRA before the tax filing deadline, including extensions.

Tax Treatment

Roth IRAs allow investments to grow tax-free as long as contributions are made with after-tax income. This differs from traditional IRAs, where contributions may be deductible, but withdrawals are taxed as ordinary income. Because Roth IRAs use post-tax dollars, there are no required minimum distributions (RMDs), meaning account holders can let their investments grow indefinitely.

Investment earnings within a Roth IRA are shielded from capital gains and dividend taxes, which can provide a significant advantage over taxable brokerage accounts. In a standard investment account, qualified dividends are taxed at rates ranging from 0% to 20%, while short-term capital gains can be taxed as high as 37%. Because a Roth IRA eliminates these taxes, long-term investors can benefit, particularly if they hold assets that generate significant appreciation or dividend income.

Withdrawals from a Roth IRA

Accessing funds from a Roth IRA comes with specific rules that determine whether withdrawals are tax-free or subject to penalties. Roth IRAs provide more flexibility than traditional retirement accounts, particularly for those who may need to access contributions before retirement.

Qualified Withdrawals

To withdraw earnings tax-free, the account must have been open for at least five years, and the account holder must be at least 59½ years old. This five-year rule applies even if the individual has reached retirement age. For example, someone who opens a Roth IRA at 57 would need to wait until 62 to withdraw earnings without taxes or penalties.

Exceptions exist for first-time home purchases, allowing up to $10,000 in earnings to be withdrawn penalty-free, though taxes may still apply if the five-year requirement is not met. Other exemptions include disability and beneficiary distributions after the account holder’s death.

Non-Qualified Withdrawals

If a withdrawal does not meet the qualified distribution criteria, earnings may be subject to income tax and a 10% early withdrawal penalty. However, contributions can always be withdrawn tax- and penalty-free, as they were made with after-tax dollars. For example, if an individual contributed $30,000 over several years and the account grew to $50,000, they could withdraw the original $30,000 at any time without consequence, but the $20,000 in earnings would be subject to penalties unless an exception applies.

Certain situations, such as higher education expenses or unreimbursed medical costs exceeding 7.5% of adjusted gross income, may allow for penalty-free withdrawals, though taxes on earnings would still be due.