The Roth IRA

The mechanic, and why it is worth so much

A Roth IRA takes after-tax dollars. Once inside, dividends, interest, and capital gains accumulate untaxed, and qualified withdrawals in retirement come out tax-free. There is no year in which you owe anything on the growth, and no tax bill at the end.

The reason that matters is proportion. Contribute $7,500 a year from 25 to 65 at a 7% average return and the money you actually put in is a minority of what you end up holding:

Assumes $625 invested monthly, 7% average annual return, compounded monthly, contributions at month-end, contribution amount held flat. Illustration only; actual limits rise over time and returns vary.

By 65, roughly $1.34 million of that $1.64 million balance is growth — and in a Roth, none of it is taxable. Run the identical strategy in an ordinary taxable brokerage account and two things bite: dividends and any realised gains are taxed along the way, which drags on compounding every year, and whatever is left is taxed again when you sell. We are not going to invent a tax rate you will face in 2066, but the direction is not in dispute: the taxable version ends with materially less spendable money, and the gap widens the longer the money sits.

The 2026 numbers, and what "phase-out" actually means

2026 figures from IRS Notice 2025-67; the 2025 column is shown because these are adjusted most years. Check the current year's limits with the IRS before contributing.

The limit is a single bucket across all your IRAs: $7,500 total in 2026, not $7,500 into each. Most pages get the phase-out wrong, so plainly — it is not a cliff. Below the bottom of your range, you may contribute the full amount. Above the top, you may contribute nothing directly. Inside the range, your allowable contribution shrinks proportionally as income rises through it, so a single filer partway between $153,000 and $168,000 in 2026 can still put in a reduced amount. MAGI is modified adjusted gross income, not salary, and it is computed after pre-tax 401(k) deferrals — which means deferring more at work can pull you back under the line.

Roth or traditional, and the two things only a Roth gives you

The choice between Roth and traditional is the same single comparison covered on the 401(k) page: your marginal tax rate now against your expected rate at withdrawal. Pay tax at the lower of the two. It does not need restating here.

What is genuinely Roth-specific are two structural features. First, a Roth IRA has no required minimum distributions during the original owner's lifetime, so the balance can keep compounding untouched for as long as you like rather than being forced out on a schedule. Second, your contributions — the money you put in, not the earnings on it — can be withdrawn at any time, at any age, without tax or penalty, because you already paid tax on them.

That second feature makes a Roth IRA a usable backstop for someone who has no cash buffer at all: money going in is available if a genuine emergency hits, and stays invested if it doesn't. Say it clearly though — this is a fallback, not a plan. Pulling contributions out permanently destroys tax-advantaged space you cannot re-contribute later, and a real emergency fund in cash is what should be absorbing the shock.

Above the income limit: the backdoor, in outline

If your MAGI is over the top of your phase-out range, you cannot contribute to a Roth IRA directly. There is a well-established route around it: contribute to a traditional IRA, which has no income limit on contributions, then convert that balance to a Roth. This is what people mean by a backdoor Roth.

The complication is the pro-rata rule. The tax on a conversion is calculated across all of your traditional, SEP, and SIMPLE IRA balances combined, not just the account you converted. If you already hold pre-tax IRA money — a rollover from an old employer plan, most commonly — a chunk of your conversion becomes taxable, and the clean version of this manoeuvre stops being clean. There are ways to deal with that; there are also ways to get it expensively wrong. This is the point at which you involve a tax professional rather than a website.

Where it sits in the funding order

The sequence most people should follow: capture the full employer match in the 401(k) first, because nothing else pays a guaranteed 50% or 100% on the way in. Then fund the Roth IRA, which gives you a wider fund menu and lower fees than most workplace plans. Then go back and fill remaining 401(k) deferral space. The how to save $100k page sets out the full ladder, including where high-interest debt and cash reserves interrupt it.

Opening the account is not the same as investing the money — a Roth IRA holding cash earns nothing. What to buy inside it is covered under index funds, and the broader sequence lives on the investing hub. If you want to see what filling this account every year does to your date with financial independence, put your own numbers into the millionaire calculator.

Educational content, not financial, tax, or legal advice. Figures are illustrations based on stated assumptions, not guarantees; markets involve risk, including loss of principal.