How Does a Roth IRA Grow?

By Chris Duderstadt

September 11, 2023

How Does a Roth IRA Grow?

Key Points – How Does a Roth IRA Grow?

  • Understanding the Power of Compound Interest
  • Roth vs. Traditional
  • Examples of Compound Interest and Backdoor Roth IRAs
  • Reviewing the 2023 Roth IRA Contribution Limits
  • 8 Minutes to Read | 23 Minutes to Watch

How Does a Roth IRA Grow?

Do you have a good understanding of compound interest? If you do, you’ll probably catch on quickly to the concept of how a Roth IRA grows. If you’re not familiar with compound interest or Roth IRAs, follow along as Dean Barber and Bud Kasper answer the question, “How does a Roth IRA grow?” We’ll do our best to explain in simple terms how the Roth IRA can be an effective tax savings vehicle.

How Does a Roth IRA Grow?: Contributions

Before we illustrate the benefits of compound interest with how a Roth IRA grows, let’s break down the difference between Roth and traditional IRAs. Roth and traditional IRAs (and 401(k)s) can both play big roles in saving for retirement. With traditional IRAs, you make before-tax contributions that are tax-deferred. You’re not required to pay the tax until you withdraw the funds.

With Roth IRAs, you make after-tax contributions that come out tax-free. You pay the tax up front with Roth contributions. It’s also important to note that the Roth IRA earnings grow tax-free and can come out tax-free under certain conditions. If you want to avoid a 10% early withdrawal penalty, you need to be 59½ or older and have the account open for a minimum of five years. However, there are 20 exceptions to the IRA early withdrawal penalty. Dean and Bud reviewed those exceptions on a recent episode of America’s Wealth Management Show. Make sure to tune in to find out if you might meet the criteria for one of the exceptions.

To get a complete analysis of the Roth vs. traditional debate and what all needs to be considered, subscribe to The Guided Retirement Show. Modern Wealth Management Director of Tax Corey Hulstein, CPA will join Dean and Bud to break it all down on Episode 94 of The Guided Retirement Show, which releases on September 12. You won’t want to miss it!

“The title of this article is, How Does a Roth IRA Grow? Well, how does it not grow? If you’re in a Roth IRA, you don’t have the taxes pulling it down.” – Bud Kasper

How Does a Roth IRA Grow: Investments and Compound Interest

Another factor of how a Roth IRA can grow is through your investments. Your Roth IRA can hold a wide variety of investments—ranging from stocks and bonds to ETFs and mutual funds. The investments you hold in your IRA are up to you and your account’s performance depends on how they perform.

As we saw last year with how tough of a time it was for stocks and bonds, it’s critical to have diversification with your investments. It’s crucial to have a good understanding of asset allocation and tax allocation as you try to mitigate risk within your portfolio.

The Power of Compound Interest

Here’s where the compound interest component comes into play with the growth of a Roth IRA. Over time, your investments will accumulate interest that gets added to your account. We’re going to run through an example of how that interest can compound and make a huge difference in your retirement savings here shortly.

2023 Contribution Limits

Before we go through that example, we need to review some of the retirement plan contribution limits for 2023. For Roth and traditional IRAs, you can contribute up to $6,500 in 2023. To clarify, you can’t contribute $6,500 each to a Roth and traditional IRA. That $6,500 is a cap for how much you can contribute collectively to your IRAs.

There are also catch-up contributions that you can take advantage of if you’re 50 or older. Catch-up contributions don’t correlate to inflation and the limit for 2023 is $1,000.

What’s MAGI?

Specifically with Roth IRA contributions, you need to consider you modified adjusted gross income (MAGI). If you’re married filing jointly, you can make a full Roth contribution in 2023 if your income is less than $218,000. You and your spouse can still make a partial contribution if your collective income is between $218,000-$228,000. If you’re a single filer, that limit for a full contribution is $138,000. The range for a partial contribution is $138,000-$153,000 if you’re a single filer.

The Backdoor Roth Can Also Be an Option

Did you exceed that $228,000 or $153,000 income limit? If so, there’s still another option for you to make a Roth contribution. That’s through a backdoor Roth IRA. It might sound confusing, but a backdoor Roth IRA actually isn’t a type of IRA. The backdoor IRA is a strategy in which you can open a traditional IRA, make non-deductible contributions, and then do a Roth conversion. There are no taxes due because you already paid the tax on the money before it went in.

There’s a special form, Form 8606, that you fill out when you do your tax return when you make an after-tax contribution to a traditional IRA. You still need to do that, but then you can go in and immediately convert and there’s no taxes due.

Pros and Cons of a Backdoor Roth IRA

Now, there is some caution that you need to take with backdoor Roth IRAs. If you have any other IRA money, then you convert on a pro-rata basis.

Let’s say that you had $100,000 in a traditional IRA and want to do a backdoor Roth. You can make up to a $6,500 contribution to the traditional IRA and immediately convert it. That $6,500 is only 6.5% of the $100,000. So, when you do the conversion, only 6.5% of $6,500 will not be taxable. The rest of it will become taxable when you do the conversion.

“To do the backdoor Roth effectively, you can’t have any other money in a traditional IRA. But how do you get away from that? If you have a 401(k), most 401(k)s now allow for a rollover into the 401(k) from an IRA. So, there are pros and cons on both sides of this.” – Dean Barber

You really need to have an entire financial plan and work with a CFP® Professional and CPA together to see if a backdoor Roth IRA makes sense from a long-term tax perspective.

Explaining the Rule of 72 to Understand How a Roth IRA Grows

We’re also going to run through an example to demonstrate how compound interest is a huge factor with Roth IRA growth. But first, we need to explain the Rule of 72.

The Rule of 72 basically says that if you take the interest rate that your investment is expected to perform at and divide that by 72. That will give you the number of years that it takes for your money to double. So, let’s do some quick and easy math. Take 72 and divide it by 10. That’s 7.2. That means every 7.2 years your money doubles.

However, compound interest becomes much more complicated than that when you’re making annual contributions or monthly contributions to your Roth. If you do an annual contribution to a Roth IRA and do it in January of every year, you’re going to be better off from a compound interest perspective than making a monthly contribution that adds up to $6,500 each year.

A Compound Interest Example

For example, if you put $6,500 a year in a lump sum and get 6% interest compounded monthly, you’re going to wind up with somewhere around $160,371.43 with about $97,500 contributed over that 15-year period. That’s not a lot of extra interest yet. That’s why it’s important to start contributing early.

“Somebody that did that from age 21 to 36 and then left it alone is going to have more money in their Roth IRA than somebody that starts at age 30 and puts it in every single year until they turn 65.” – Dean Barber

The Roth 401(k) Match

If you are still working, there was some exciting news regarding Roth 401(k)s in the SECURE Act 2.0, which became law on January 1, 2023. One of SECURE 2.0’s provisions made it so that employers can make matching contributions to the Roth. However, it’s going to take a while for some companies to get up to speed with offering the match.

“This is an extra bonus. It’s the cherry on top.” – Bud Kasper

And circling back to income limits, we should also mention that there are no income limits with Roth 401(k)s. You can make as much money as you want and still be eligible to contribute. That’s another thing that Dean, Bud, and Corey will break down in the Revisiting Roth vs. Traditional episode of The Guided Retirement Show.

How Does a Roth IRA Grow: By Avoiding RMDs

Our last point about Roth IRA growth involves Required Minimum Distributions. One of the best things about Roth IRAs is that you’re never forced to start taking money out. That’s not the case with traditional IRAs.

With RMDs, a distribution of a required amount based on a uniform lifetime table from the IRS that is forced out of a traditional IRA regardless of if you need to spend it. Typically, an RMD is larger than the amount of money that someone needs to spend in a given year. Therefore, RMDs can have the following negative impacts:

RMD Age Changes from 72 to 73

You can probably see from those three points alone why we encourage people to start planning for RMDs well before they hit the RMD age of 73. The rules for RMDs changed when SECURE 2.0 became law. The RMD age bumped up from 72 to 73, and is set to move up again to 75 on January 1, 2033.

The change in RMD age from 72 to 73 was pivotal for some people, as it gave them another year to take advantage of Roth conversions before the Tax Cuts and Jobs Act sunsets on December 31, 2025. Tax rates will be going back up to the rates from 2017 in 2026. That makes converting to a Roth IRA before 2026 very appealing, as you would be paying the tax at today’s lower rates.

Does Your Family Understand How a Roth IRA Grows?

The tax-free growth of inherited Roth IRAs can be a blessing to your loved ones, too, if you’re wanting to leave a legacy. Your beneficiary will be required to withdraw the funds from the inherited Roth IRA over 10 years, but they still get to benefit from the tax-free growth.

“A Roth IRA grows, distributes, and passes to the next generation tax-free. It doesn’t cause Social Security to become taxable or affect your Medicare premiums. The list goes on and on with the benefits of a Roth IRA.” – Dean Barber

Do You Have Questions About How a Roth IRA Grows?

We can’t emphasize enough that the decision between Roth and traditional will be different for everyone. There are a lot of factors to consider. We addressed Roth vs. traditional and many other important retirement considerations in our Tax Reduction Strategies guide. It includes various tax planning strategies that can show you the importance of mitigating taxes over your lifetime, not just in one year. You can download your copy below!

How Does a Roth IRA Grow

Download: Tax Reduction Strategies Guide

As you’re reviewing our Tax Reduction Strategies guide, we hope that you’ll begin to see why it’s critical to work with a team of professionals. Taxes can be extremely complex. We strongly believe that the financial planning process should include CPAs that work alongside CFP® Professionals to review a client’s financial plan from a tax perspective.

If you have questions about what that looks like or specifically how a Roth IRA grows, fire those to us. You can ask us those questions during a 20-minute “ask anything” session or complimentary consultation. Click the button below to schedule a conversation with one of our CFP® Professionals and/or CPAs.

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We can meet with you in person, virtually, or by phone depending on what’s easiest for you. It’s our goal to help you make educated decisions that can help give you more confidence, freedom, and time in retirement.

How Does a Roth IRA Grow? | Watch Guide

00:00 – Introduction
01:58 – Special Episode of The Guided Retirement Show
03:11 – Become a Rothaholic!
04:17 – Roth vs. Traditional
07:18 – Roth IRA Contribution Limits
08:15 – Backdoor Roth
11:55 – Compound Interest
13:46 – Let’s Talk About 401(k)s
14:50 – RMDs, Roth IRAs, and Roth Conversions
21:05 – What We Learned Today


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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.