How a Roth IRA Works

You contribute money that has already been taxed (after-tax dollars). Your investments grow tax-free. When you withdraw in retirement, you pay zero taxes on the gains.

Why This Is Incredible for Young People

If you invest $6,500/year from age 25 to 65 at a 10% average return, you will have approximately $3.5 million. You contributed $260,000 total. The remaining $3.24 million in growth is completely tax-free.

In a traditional (pre-tax) account, you would owe income tax on every dollar you withdraw. At a 22% tax bracket, that is $715,000 in taxes. A Roth IRA saves you that entire amount.

For more on this topic, see our guide on Roth IRA vs Traditional IRA: Which Is Right for You?.

Key Rules

• Contribution limit (2026): $7,000/year ($8,000 if over 50).
• Income limit: You cannot contribute directly if you earn over $161,000 (single) or $240,000 (married). Backdoor Roth conversions exist for higher earners.
• Withdrawal of contributions: You can withdraw your contributions (not gains) at any time, for any reason, with no penalty. This makes it a dual-purpose emergency fund and retirement account.
• Withdrawal of gains: Tax-free and penalty-free after age 59.5, provided the account has been open for at least 5 years.

For more on this topic, see our guide on Investing 101: A No-Nonsense Beginners Guide to the Stock Market.

Roth IRA vs. Traditional IRA

Feature	Roth IRA	Traditional IRA
Tax on contributions	Pay now	Deduct now
Tax on withdrawals	Tax-free	Taxed as income
Best if your tax rate will be	Higher in retirement	Lower in retirement
Required Minimum Distributions	None	Starting at 73

For most young people, a Roth IRA is the clear winner because your income (and tax rate) is likely to be higher in the future than it is now.

How to Open One

1. Choose a brokerage: Fidelity, Schwab, or Vanguard (all free).
2. Open a Roth IRA account (15-minute online process).
3. Fund it via bank transfer.
4. Buy a total stock market index fund.
5. Set up automatic monthly contributions.