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✨ Featured Lessons · Lesson 22 of 54 · 75 sec

The Roth IRA Tax Cheat Code

🔐 Pay tax once now, then never pay tax on the millions it grows into. The Roth IRA is about as close to legal tax magic as exists — which makes it strange that most people never open one.

💡 Key idea

Roth = pay tax once (small) → millions of gains TAX-FREE forever.

🧠 Why it matters

Roth IRA: pay income tax on money NOW. Invest it. Let it grow for decades. When you withdraw in retirement (59½+, account open 5+ years): ZERO taxes on ANY gains. Forever. Your own contributions can come out anytime. Compare to taxable account: pay capital gains 15-20% on every dollar of gain. (Income limits apply — direct contributions phase out starting at $153k single / $242k joint in 2026.)

🌍 In the real world

💎 Sarah opens Roth IRA at 25. Contributes $7,500/year for 40 years. Total contributed: $300,000. At 8% growth = $1.9 MILLION. Total tax owed at retirement: $0. Same money in taxable account = roughly $250k in taxes paid. The Roth saved her about $250,000. Free.

📌 Takeaways

  • Pay income tax now, never on gains later
  • $7,500/year limit (2026)
  • Open one TODAY at Fidelity, Schwab, or Vanguard

✅ Test yourself

Roth IRA contribution limit (2026)?
  1. $1,000
  2. $3,000
  3. $7,500
  4. $50,000

Answer: C · $7,500

$7,500 per year in 2026 ($8,600 if 50+). Max it out every year if possible. Even partial contributions still get the tax-free growth benefit.

Main Roth IRA advantage over taxable account?
  1. Higher returns
  2. All gains and withdrawals are TAX-FREE
  3. Government insured
  4. No risk

Answer: B · All gains and withdrawals are TAX-FREE

Returns are identical (same investments). Difference: in Roth, you keep 100% of gains. In taxable, you keep ~80-85% of gains after long-term capital gains taxes. Over decades, massive difference.

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