Listen. If you don’t listen to anything else I say, please hear me on this: you should open a Roth IRA (and then, of course, invest the money in it). That’s all. Thanks for coming to my TED Talk.

But seriously, I talk about Roth IRAs a lot, and if you’ve ever wondered why I’m so passionate about this retirement tool, let me break it down for you. Roth IRAs are one of the most powerful financial tools available, especially when it comes to tax planning and investing for the future. Here’s why you need one—and why it’s one of the best moves you can make for your financial future.

What is a Roth IRA and Why Should You Care?

A Roth IRA (Individual Retirement Account) is an investment account that offers a unique advantage: it allows your money to grow tax-free. That’s right—once you contribute to a Roth IRA and the money has already been taxed (since it’s a post-tax account), that’s it. No more taxes from Uncle Sam! This is huge, and here’s why: with a traditional investment account, you’re taxed on your earnings every year. But with a Roth IRA, you can watch your money grow without worrying about that annual tax bill eating into your gains.

If that sounds too good to be true, let me reassure you—it’s not. In fact, it’s a game-changer for anyone looking to build wealth and save for retirement. Once you hit retirement age, you can withdraw your earnings from your Roth IRA tax-free. That’s not just the contributions you made—all of it: your earnings, dividends, and capital gains.

Let me break this down further with an example that shows just how powerful a Roth IRA can be over time.

The Power of Compound Interest: How $7,000 a Year Could Turn Into $1.8 Million

Let’s imagine you’re 25 years old and you start contributing to your Roth IRA. The annual contribution limit for a Roth IRA in 2024 is $7,000 (if you’re under 50), and you decide to contribute that maximum amount every single year until you turn 65. So that’s $7,000 invested annually for 40 years.

Now, let’s assume you earn an average annual return of 8%, which is a reasonable estimate for long-term stock market investments (keep in mind, past performance is not indicative of future results, but 8% is often used as a conservative estimate for long-term growth in the market). If you stick to this strategy—contributing the maximum and letting your money grow tax-free—by the time you reach age 65, you will have $1.8 million in your Roth IRA.

And the best part? When you take that $1.8 million out, you don’t have to pay a dime in taxes! That means the full $1.8 million is yours to keep. Compare that to traditional retirement accounts like a 401(k), where you have to pay taxes on your withdrawals. When you consider that the average American retirement savings is far lower than $1.8 million, you can see why a Roth IRA is such a powerful tool for building long-term wealth.

Why $7,000 a Year Can Make a Huge Difference

Here’s the kicker—many people don’t realize that contributing to a Roth IRA doesn’t have to be a huge sacrifice. $7,000 a year comes out to about $583 per month. While that might sound like a lot to some, when you break it down, it’s a manageable amount for most people, especially if you start when you’re young.

Even if you’re not 25 anymore (it’s okay—don’t panic!), it’s still worth starting to contribute to a Roth IRA. The key is to start now—no matter where you are in life. The earlier you start, the more time your money has to grow, and the more you can take advantage of compound interest.

So let’s say you’re in your 30s or 40s and you’ve never contributed to a Roth IRA before. It’s not too late! The power of tax-free growth still works in your favor, and with consistent contributions over time, you can still build a sizable nest egg.

The Limits of a Roth IRA: Income and Contribution Caps

As with most things in life, the Roth IRA does come with some limits. One of the biggest restrictions is the contribution limit. For 2024, the maximum you can contribute to a Roth IRA is $7,000 per year if you’re under 50. If you’re 50 or older, you can contribute an additional $1,000 for a total of $8,000 per year. But that’s the maximum. If you’re making more than that, you can’t contribute to a Roth IRA directly.

The second limit is your income. For 2024, if your modified adjusted gross income (MAGI) is over $146,000 as a single filer, or over $218,000 as a married couple filing jointly, you’re no longer eligible to contribute directly to a Roth IRA.

The Backdoor Roth IRA: A Loophole to the Contribution Limits

Now, I’m sure some of you are thinking, “What if I make more than that? Does that mean I’m out of luck?” The answer is no. There’s a workaround called the Backdoor Roth IRA, which allows people with high incomes to contribute to a Roth IRA indirectly. The backdoor method involves contributing to a traditional IRA (which has no income limits), and then converting that money into a Roth IRA.

It sounds complicated, but the process is straightforward enough with the right guidance. Essentially, you’re taking advantage of a loophole that bypasses the income limits for direct Roth IRA contributions. It’s a great way for higher earners to still benefit from the tax-free growth that a Roth IRA offers. But be aware, this process can have tax implications, so it’s essential to work with a financial advisor who understands the intricacies of the backdoor Roth IRA strategy.

Is a Roth IRA Always the Right Choice?

For the vast majority of people, a Roth IRA is an incredible tool for retirement planning and investing. But there are some exceptions to consider.

If you’re in a high tax bracket—say, you’re paying 32% or higher in income taxes—there might be a scenario where it’s better to defer your taxes instead of paying them upfront. The reason for this is that you could potentially lower your tax burden by contributing to a traditional IRA or 401(k), which lets you contribute pre-tax money and lowers your taxable income for the current year. This can be a good strategy if you believe you’ll be in a lower tax bracket in retirement.

However, if you’re in a lower tax bracket or you expect your taxes to go up in the future, then the Roth IRA is likely the better choice. Roth IRAs allow you to pay taxes now, while avoiding them down the line when your account has grown substantially.

If you’re unsure about which option is right for you, consulting a financial advisor can help you make the best decision based on your current and future financial situation.

Final Thoughts: Make Your Money Work for You

A Roth IRA is one of the best retirement accounts out there, and if you’re not already taking advantage of it, now’s the time to start. The ability to grow your money tax-free and withdraw it tax-free when you retire is a huge benefit that shouldn’t be overlooked. Whether you’re just starting your career or already have a substantial income, a Roth IRA can be an integral part of your long-term financial strategy.

Also, for those of you planning to contribute to your Roth IRA, here’s an important reminder: you only have a few more weeks until the end of the year to max out your Roth IRA for 2024. If you don’t use your contribution room before December 31st, you’ll lose it, as it resets with the new annual limit in 2025 (which remains at $7,000). So, make sure to prioritize your retirement savings now and take full advantage of this powerful investment tool before the year closes out!

If you’re unsure how to open a Roth IRA or need help getting started, there are plenty of resources available. You can also reach out for a consultation if you have questions. Don’t wait for “the right time” to invest—start as soon as possible. Your future self will thank you.