Roth IRA Explained: Why Every 20-Something Should Open One This Week

What is a Roth IRA?

IRA stands for Individual Retirement Account. "Roth" refers to the type — you fund it with money you've already paid income tax on. You don't get a tax break today, but in exchange, every dollar of investment growth comes out completely tax-free after age 59½.

It's an account, not an investment. Inside it, you can hold index funds, ETFs, stocks, bonds, almost anything. The Roth wrapper is just the magic envelope that makes the growth tax-free.

The magic: tax-free growth forever

Put $7,000 in a Roth IRA at age 25. Invest it in a broad index fund averaging 8% per year. By age 65, that single contribution is worth roughly $152,000 — and you owe exactly $0 in taxes when you withdraw it.

Do that every year from 25 to 65 and you're looking at well over $2 million, tax-free. A regular brokerage account would have lost a meaningful chunk of those gains to capital gains tax along the way.

Contribution and income limits

As of 2024, you can contribute up to $7,000 per year to a Roth IRA if you're under 50. There's also an income limit: if you make more than roughly $161,000 as a single filer, you can't contribute directly. Almost no one in their first job hits this ceiling.

One important rule: you can only contribute earned income. Freelance and W-2 wages count. Investment income and gifts don't.

Roth IRA vs traditional IRA — which one for young people?

A traditional IRA gives you a tax break today and you pay tax later when you withdraw. A Roth flips that: pay tax today, withdraw tax-free later.

The right choice depends on whether you'll be in a higher tax bracket now or in retirement. For someone in their first job earning $50,000 — likely paying a low effective tax rate — the Roth is almost always the better deal. You're locking in today's low tax rate forever.

How to open one (in about 15 minutes)

1. Pick a brokerage. Any major low-cost broker works fine.
2. Open a Roth IRA account online. You'll need your Social Security number and bank info.
3. Link your checking account and transfer $100 (or more, up to $7,000).
4. Inside the account, buy a broad index fund or target-date retirement fund.
5. Set up automatic monthly contributions so you don't have to think about it.

That's it. Future you just got a lot richer.

The backdoor Roth (for higher earners)

If your income is too high to contribute directly, there's a perfectly legal workaround called the backdoor Roth: you contribute to a traditional IRA and then convert it to a Roth. It's a few extra steps and worth learning about if you ever cross the income limit.