A Roth IRA is a retirement savings investment account that offers tax-free gains on the money you invest in it. This means that when you start withdrawing from a Roth IRA in retirement, the distributions you take will be tax-free. This is in direct opposition to how a traditional IRA works, as these instead offer tax deferment benefits, meaning you’ll save on your taxable income now, but will pay taxes on your withdrawals in retirement. Of course, any returns you see in a Roth IRA account depend on the investments you put your assets into. Generally speaking, these accounts, on average, can achieve annual returns of between 7% and 10%, depending on their underlying investments. If you want help with making the most of your Roth IRA, consider finding a financial advisor.
How a Roth IRA Works
A Roth IRA is an individual retirement account that you contribute to using after-tax dollars. This setup allows the account holder to take tax-free withdrawals of investment earnings once they have had the account for five years and are over the age of 59.5. In this way, Roth IRAs are the inverse of tax-deferred traditional IRAs and 401(k)s, as these accounts require you to pay taxes when you withdraw the funds.
The 2024 contribution limits for Roth IRAs went up from those in 2023. You’re allowed to contribute up to $7,000 to an IRA in 2024, plus an extra $1,000 catch-up contribution if you’re over 50. Catch-up contributions allow those who are closer to retirement to contribute just a bit more to their IRAs as they get closer to retiring. For tax year 2023, the IRS allows you to contribute up to $6,500 to an IRA, plus a $1,000 catch-up contribution.
There are income limits for Roth IRAs, though. Contribution eligibility depends on your modified adjusted gross income (MAGI). You can contribute up to the limit as long as your MAGI is less than the lower limit, and it gets phased out until you reach the top limit. Beyond the income range, you will not be able to make any more contributions.
The table below breaks down the Roth IRA income limits for 2024 and 2023:
Roth IRA Income Limits for 2024 and 2023
| Filing Status | 2024 MAGI Limits | 2022 MAGI Limits |
| Single or Head of Household | $146,000 to $161,000 | $138,000 to $153,000 |
| Married Filing Jointly or Qualifying Widow | $230,000 to $240,000 | $218,000 to $228,000 |
| Married Filing Separately | Up to $10,000 | Up to $10,000 |
How a Roth IRA Earns Interest
Unlike traditional savings accounts, Roth IRAs don’t earn returns on the account alone. Essentially, a Roth IRA account starts out as an empty investment basket — meaning you won’t earn any returns until you choose investments to house within the account itself.
As you earn returns in your Roth IRA, these can compound over time like any other investment. This can have a major impact over multiple years. Whenever your investments earn a dividend or grow in size, that amount goes toward your account balance. Then you earn returns on those returns, and so on. That means your money should continue to grow regardless of whether you contribute extra money or not.
Several factors will impact how your money grows in a Roth IRA, including how diversified your portfolio is, what is your timeline for retiring and how much risk are you willing to take on. While there isn’t necessarily a historical rate of return for Roth IRAs – remember, they are types of accounts, not investments – annual returns for typical retirement portfolios can range from 7% to over 10%. For example, a 60/40 portfolio (60% equities, 40% bonds) has averaged an annual growth rate of 8.77%, according to data from Vanguard.
Meanwhile, investing 90% of your assets in equities and only 10% in bonds historically produces a return of nearly 10%, although this may be too aggressive of an asset allocation for savers nearing retirement.
Let’s say you open a Roth IRA and contribute the maximum amount each year. If the base contribution limit remains at $7,000 per year, you’d amass over $100,000 (assuming a 8.77% annual growth rate) after 10 years. After 30 years, you would accumulate over $900,000.
On the other hand, if you decided to put your money in a savings account that didn’t yield interest, you would only have $70,000 after 10 years ($6,000 multiplied by 10). To calculate the growth of your contributions, check out SmartAsset’s investment calculator.
How to Maximize Your Roth IRA Returns
Just because a Roth IRA helps you save for retirement doesn’t mean that all accounts are on equal footing. Where you choose to open an account can have a big impact on the investment selections you have. This will then affect your long-term returns. For example, a traditional bank may only offer Roth IRAs as a certificate of deposit (CD), which typically has a lower rate of return.
For the widest variety of investment options, it may be best to open an IRA through a broker. With a broker, you can select your investments based on both your financial objectives and risk tolerance. These investments could include a mix of stocks, bonds, index funds and exchange-traded funds (ETFs).
If you prefer a more hands-off approach, consider opening a Roth IRA account with a robo-advisor, which uses software to manage your investments online. These types of accounts usually come with lower fees as well. That’s because no human advisors interact with your portfolio. Instead, it automatically runs through computer algorithms that continually adjust for your age, timeline and risk tolerance. Many robo-advisors will use index funds or ETFs for your investment mix in your Roth account.
Bottom Line
Roth IRAs are a popular retirement account choice for a reason. It’s because they’re easy to open with an online broker can deliver between 7% and 10% in average annual returns depending on how you invest. Roth IRAs harness the advantages of compounding, which means even small contributions can grow significantly over time. That’s why is important to open a Roth IRA sooner rather than later. That means you’ll be more ready for retirement the longer your money has to grow.
Tips for Investing for Retirement
- A financial advisor can help you manage your investment portfolio for retirement Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s retirement calculator can show you if you’re on pace to meet your savings goals.
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