Blog

[Prefer to listen? You can find a podcast version of this article here: E2: The Roth IRA Advantage]

If you’ve ever heard someone mention a “Roth IRA” and immediately zoned out, you’re not alone. Retirement accounts can sound intimidating, filled with numbers, rules, and jargon. But here’s the truth: understanding Roth IRAs can be life-changing for your financial future, especially if you’re in the early stages of your career.

So, let’s break it down in plain English: what a Roth IRA is, why it’s such a powerful tool, and how to actually get started.

What Exactly Is a Roth IRA?

A Roth IRA is a type of retirement savings account that allows your money to grow tax-free. That means when you retire, you can withdraw your savings, and all the investment growth, without paying a single cent in taxes.

That’s huge.

To understand why, you first have to understand how retirement accounts work. They’re basically containers for your money that offer tax advantages, designed to help you save for the future. Once you put money into one, you usually can’t touch it until you’re at least 59½ (yes, the half is real, and no, I don’t know why).

Retirement accounts can further be broken down into two categories: Workplace plans (think 401(k), TSP, 403(b), SEP IRA) and IRAs (think traditional IRA, rollover IRA, and Roth IRA).

Let's Talk Taxes

Narrowing down even further, the main distinction between a Traditional IRA and a Roth IRA is all about when you pay taxes.

• Traditional IRA: You get a tax break now. Your contributions lower your taxable income today, but when you retire and withdraw the money (plus all that investment growth), you’ll owe taxes on it later.
• Roth IRA: You pay taxes now, but in retirement, you withdraw every penny, contributions and growth, completely tax-free.

Think of it like this: with a traditional IRA, Uncle Sam lets you skip the tax bill today, but he’ll be waiting for his share when you cash out. With a Roth IRA, you pay him upfront, and then he’s out of your life for good.

Why a Roth IRA Is So Powerful When You’re Young

Here’s where this gets exciting, especially if you’re in your 20s or 30s.

1. You’re likely in a lower tax bracket now. Paying a little in taxes on your contributions today is easier than paying a lot later when you’re earning more. As yourself this: will my salary increase over the next 5 to 15 year? If the answer is yes, you are likely in a good position to benefit from a Roth IRA.
2. Your money has decades to grow. Time is the most powerful force in investing. Thanks to compound growth, even small amounts can snowball. More on this to come, but don’t discount the power of having time on your side.
3. You’re building habits early. Getting into the rhythm of saving and investing while your expenses are lower sets you up for lifelong success.

Who Can Contribute and How Much

To be eligible for a Roth IRA, you need:

• Earned income (from a job, freelancing, etc.)
• To earn under $150,000 a year (MAGI) if filing single in 2025 (the limit adjusts yearly)

For 2025, you can contribute up to $7,000 per year (or $8,000 if you’re over 50). And you actually have until tax day of the following year to make your contribution, meaning you could contribute for 2025 anytime up until April 2026. Be sure to check for changes to the contribution's limits and phaseouts each year. 

If you can’t hit the full $7,000, don’t worry, even $25 or $100 a month adds up when you’re investing consistently.

If you work for an employer that offers a workplace plan, check if they also offer a Roth option. It works like a Roth IRA with after-tax contributions and tax-free withdrawals, but it allows for much higher contribution limits and has no income cap. It’s one of the best tools for high earners who are phased out of Roth IRA eligibility but still want that tax-free growth.

How to Open a Roth IRA

Opening one is much simpler than most people think. Here’s the quick guide:

1. Choose a brokerage firm. Think reputable, low-cost options with great online tools.
2. Open a Roth IRA account. This takes about ten minutes online.
3. Fund the account. You can start with any amount, and even set up automatic contributions from your checking account.
4. Invest the money. This is crucial! Don’t just let it sit in cash, choose a simple fund, like a target-date fund or a total market ETF, and let it grow overtime. People tend to get caught up on this step, but simple is sometimes the most effective method.

Final Thoughts: Starting Small is Better Than Not At All

You don’t need to max out your Roth IRA to make a difference. Even starting small builds the muscle of saving and investing, and that habit will serve you for decades.

We like to tell our clients this: if you’re out sailing and notice you’ve drifted off course, it’s easy to make a small correction and get back on track. But the longer you wait, the farther you drift and the tougher it becomes to find your way back.

The same goes for saving. The sooner you start, the easier it is to stay on track.

Invest in your future self – she deserves it.