What is a Roth IRA?
A Simple Guide to Tax-Free Wealth
Investing can feel confusing or intimidating, and that’s completely normal. The financial world is full of jargon, and things are often made to sound way more complicated than they need to be. Figuring out where to start can feel overwhelming, but don’t worry, we’ve got you covered. In this beginner’s guide, we’ll simplify the Roth IRA so you can begin your investing journey with confidence.
What is a Roth IRA?
A Roth IRA is a tax-advantaged retirement account that allows you to contribute after-tax dollars towards your retirement. It gives you the ability to invest on your own, outside of your company’s retirement plan.
FYI: IRA stands for Individual Retirement Account. Basically, it means you are the account owner and you control the money.
How Much Can I Contribute?
The IRS updates contribution limits over time. For the 2025 tax year, you can contribute up to $7,000 until April 15th, 2026. After that, contributions apply to 2026, with a limit of $7,500.
How Much Should I Contribute?
Deciding how much to contribute to your Roth IRA depends on your financial situation.
Ask yourself these questions:
Have I paid off high interest debt? (High interest = 8-10% or more)
Do I have an emergency fund? (3-6 months of living expenses)
Are there any upcoming large expenses I need to plan for?
Even if you haven’t completed all these steps, you should still open a Roth IRA and start investing. You can begin with as little as $1. When I first started, I set aside $100 per month, and that habit motivated me to increase my contributions over time.
Once you’ve completed those steps, aim to contribute as much as you can. Ideally, you’ll want to max your Roth IRA every year.
Where Do I Open My Roth IRA?
You’ll need to choose a custodian to open your account with. I recommend a large, reputable institution like Fidelity, Vanguard, or Charles Schwab. I personally use Fidelity and have been very pleased with their platform and customer service.
Traditional IRA vs. Roth IRA
The biggest difference between a Traditional IRA and a Roth IRA is when the money is taxed.
Traditional IRA: You defer taxes until retirement, which reduces your taxable income now.
Roth IRA: You pay taxes now, and withdrawals become tax-free in retirement.
A Roth IRA is powerful because your money will compound over time without being taxed later. The choice depends on whether you expect to be in a higher or lower tax bracket when you retire.
What Do I Do With the Money Once I Contribute?
After you contribute, you need to invest the money. You can buy assets like stocks and bonds. However, picking individual stocks can be risky, especially when you’re starting out.
A great way to start investing in the stock market is through exchange-traded funds (ETFs). These funds hold many companies across different industries, which helps reduce risk.
Many investors keep a simple portfolio of 1-5 diversified ETFs. Vanguard ETFs are popular because of their low fees and variety.
Popular ETFs I like:
VOO - Vanguard S&P 500 ETF
VTI - Vanguard Total Stock Market ETF
VXUS - Vanguard Total International Stock ETF
The S&P 500 is a simple, powerful way to invest. Many investors buy and hold funds like VOO for decades.
*Please ensure that you understand these funds before making any investment decisions.
Lump Sum Investing vs. Dollar Cost Averaging (DCA)
Lump Sum = Investing at all once
DCA = Investing small amounts over time
Most beginners will use DCA because it’s easier to automate. DCA means contributing a set amount on a schedule (weekly, biweekly, or monthly). While lump sum investing may perform better in many cases, DCA is a great way to stay consistent and avoid decision fatigue.
Pro Tip: Once you’re saving a healthy portion of your income and have maxed your Roth IRA for the year, consider setting aside cash in a high-yield savings account to invest in a lump sum for the next year in advance.
Are There Any Requirements to Contribute?
Yes. To contribute to a Roth IRA, you must have earned income for the year you contribute. In other words, you need income from working (like wages or self-employment income) in order to contribute. Your contribution cannot exceed what you earned that year.
Important: There are also Roth IRA income limits to be eligible to contribute. To ensure you are eligible, please read the rules each tax year: Fidelity Investments - Roth IRA Income Limits
For 2025, The Roth IRA income limit to make a full contribution in 2025 is less than $150,000 for single filers, and less than $236,000 for those filing jointly.
For 2026, the Roth IRA income limit to make a full contribution in 2026 is less than $153,000 for single filers, and less than $242,000 for those filing jointly.
If your income is under the limit, you are eligible to contribute. Here’s a simple framework to get started:
5-Step Framework:
Choose a custodian (Fidelity, Vanguard, or Schwab)
Link your bank account
Choose an amount & automate it
Select your investments
Make updates over time
Set-Up Tips:
Turn on dividend reinvesting (buys more shares for you)
Select your beneficiaries
Start Investing Today
You now have the information you need to create an account and begin your journey. The key to your success investing is knowledge and consistency. Time is your best friend when it comes to investing. The earlier you start, the more time your money has to grow and you’ll contribute less per month to get to $1,000,000.
Fun Fact:
The Roth IRA was created by US Senator William Roth as part of the Taxpayer Relief Act of 1997, which took effect for contributions on January 1, 1988. The goal of its creation was to broaden retirement savings options and encourage Americans to save more for their future. The Roth IRA made saving more attractive and accessible by providing an alternative to the Traditional IRA.
Investing in a Roth IRA or other investment accounts involves the risk of loss. This content is for informational purposes only and should not be considered financial advice. I am not a financial advisor. Always do your own research and consider reaching out to a professional if needed.
