What is a Roth IRA?

It can be difficult to distinguish between all the different kinds of bank accounts out there. You could open checking accounts, savings accounts, brokerage accounts, and retirement accounts. So what is the difference? Well, each account has a unique purpose, with the Roth IRA serving an important one.

This post will cover everything you need to know about a Roth IRA before opening one, so let’s jump right in.

The Actual Account

The Roth IRA is a type of retirement account which gives the users special tax benefits that normal accounts do not have. Typically, when someone sells their investment for a gain, they have to pay taxes on the profit. This is called the capital gains tax, and it is applied differently depending on how long you have owned an asset.

The goal of a Roth IRA is to encourage saving/investing for retirement. Because of this, any profits made by investing through your Roth IRA are not subject to tax. This is different from a Traditional IRA, which gives you a tax benefit up front while not changing the tax-status of your investments.

The one drawback to investing in a Roth IRA is that there can be penalties for early withdrawal of funds. Because the tax benefits are there to encourage retirement planning, you are not able to access your investment profits until you reach the age of 59 ½. Despite this, opening a Roth IRA is still one of the most profitable things a person can do at a young age.

Who Qualifies?

Most people will qualify for a Roth IRA because there are only two stipulations. The first is that you must have taxable income (earned via wages, salary, tips, bonuses, or self-employment). The second is that you cannot contribute to a Roth IRA if your income rises above a certain threshold. Your income threshold depends on your tax filing status which can be found on irs.gov and is subject to change from year to year.

In general, this is great news for investors, especially beginners or those who are starting early.

Contribution Limits

Since the Roth IRA allows for large tax breaks, the government sets yearly contribution limits. Additionally, you won’t be able to invest more money into a Roth IRA than you have made that year. The normal contribution limit for the 2026 tax year is $7,500. However, there are a few reasons that this might change.

If you are at least 50 years old, your contribution limits are increased to $8,600 a year. This is great, but your contribution limit could also be reduced significantly if your income threshold is high enough. This information can also be found on irs.gov. 

Where Do I Open a Roth IRA?

Opening a Roth IRA is a simple process and can be done through many different brokerages. Some of the best ones are Fidelity and Charles Schwab, which make it easy to get started. Once you open your account, you can get started investing right away by transferring money into the account for this designated tax-year.

The Advantage to Starting Early

The sooner you start investing into a Roth IRA the better. This is because of the power of compounding interest (check out my post about this here). What people can tend to forget is that their gains will compound, but so do the taxes (along with increased tax rates). By protecting a portion of your income with a Roth IRA you are maximizing the extreme value of your compounding returns.

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