How a Roth IRA Works
A Roth IRA is a powerful retirement savings vehicle with a simple trade-off: you pay taxes on contributions now, but all future growth and withdrawals are completely tax-free.
Key Benefits
- Tax-free growth: All investment gains compound without tax drag
- Tax-free withdrawals: Qualified distributions in retirement are 100% tax-free
- No required minimum distributions: Unlike Traditional IRAs, Roth IRAs have no RMDs — you never have to withdraw
- Flexible access: Contributions (not earnings) can be withdrawn anytime without penalty
- Estate planning: Beneficiaries receive distributions tax-free
2026 Contribution Limits
| Age | Annual Limit |
|---|---|
| Under 50 | $7,500 |
| 50 and older | $8,600 ($7,500 + $1,100 catch-up) |
Income Limits (2026)
| Filing Status | Full Contribution | Reduced | No Contribution |
|---|---|---|---|
| Single | Under $153,000 | $153,000-$168,000 | Over $168,000 |
| Married Filing Jointly | Under $242,000 | $242,000-$252,000 | Over $252,000 |
Roth IRA vs Taxable Account
In a taxable brokerage account, you pay capital gains tax on investment growth each year. This "tax drag" compounds over time, significantly reducing your final balance compared to a Roth IRA where gains grow tax-free.
For a 35-year investment horizon at 7% return with a 22% tax rate, the Roth IRA advantage can be 30-40% more than the taxable account balance.
Roth IRA vs Traditional IRA
| Feature | Roth IRA | Traditional IRA |
|---|---|---|
| Contributions | After-tax (no deduction) | Pre-tax (tax-deductible) |
| Growth | Tax-free | Tax-deferred |
| Withdrawals | Tax-free | Taxed as ordinary income |
| RMDs | None | Required at age 73 |
| Best if | Expect higher taxes later | Expect lower taxes later |
Tips
- Start early: Time is the biggest factor in tax-free compounding — even small contributions at age 25 outpace larger ones at 40
- Max out if possible: The $7,500 annual limit is "use it or lose it" — you can't make up for missed years
- Backdoor Roth: If your income exceeds limits, contribute to a Traditional IRA then convert to Roth (check with a tax professional)
- Choose growth investments: Since gains are tax-free, hold high-growth assets in your Roth to maximize the tax benefit