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 2025 Roth IRA Contribution Limits
7-Minute

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, buckle up as we 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 differences 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 some exceptions to the IRA early withdrawal penalty, so make sure to review them and see if any of them apply to you.

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. It’s critical to have diversification with your investments and 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.

2025 Contribution Limits and Roth IRA Income Limits

Before we go through that example, we need to review some of the retirement plan contribution limits for 2025. For traditional IRAs, all individuals are eligible to contribute up to $7,000 in 2025. There’s also a $7,000 Roth IRA contribution limit for 2025, but there are income limits to be eligible to contribute to a Roth IRA.

When making Roth IRA contributions, you need to consider your modified adjusted gross income (MAGI). If you’re married filing jointly, you can make a full Roth contribution in 2025 if your income is less than $236,000. You and your spouse can still make a partial contribution if your collective income is between $236,000-$246,000. If you’re a single filer, that limit for a full contribution is $150,000. The range for a partial contribution is $150,000-$165,000 if you’re a single filer.

We also want to clarify that you can’t contribute $7,000 each to a Roth and traditional IRA. That $7,000 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 Roth and traditional IRAs for 2025 is $1,000.

Roth 401(k) Catch-Up and Super Catch-Up Contributions

We also want to share a little bit about Roth 401(k) contribution limits. The maximum amount that you can contribute to a Roth or traditional 401(k) if you’re under the age of 50 in 2025 is $23,500. New in 2025, there are super catch-up contributions in addition to catch-up contributions for Roth and traditional 401(k)s. For 2025, individuals 50 and older are eligible to make a maximum catch-up contribution of $7,500. However, if you’re 60-63, you can contribute beyond that annual catch-up amount via a super catch-up contribution. The maximum super catch-up contribution for 2025 is $11,250.

FIGURE 1 – Maxing Out 401(k) Contributions with Catch-Up

The rules for catch-up contributions are scheduled to change again in 2026. Effective January 1, 2026, as a provision of the SECURE Act 2.0, high-income earners who make more than $145,000 will be required to make catch-up contributions to Roth accounts on an after-tax basis.

The Backdoor Roth Can Also Be an Option

If you exceeded the Roth IRA income limit, 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.1 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 $7,000 contribution to the traditional IRA and immediately convert it. That $7,000 is only 7% of the $100,000. So, when you do the conversion, only 7% of $7,000 will not be taxable. The rest of it will become taxable when you do the conversion. We encourage you to consider working with 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 72.2

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 $7,000 each year.

A Compound Interest Example

For example, if you put $7,000 a year in a lump sum and get 6% interest compounded monthly, you’re going to wind up with somewhere around $186,821.93 with about $104,999.40 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.

FIGURE 2 – Compound Interest Example – Calculator.Net

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:

Trigger more Medicare premiums
Cause additional Social Security income to be taxable
Cause you to hit the 3.8% Affordable Care Act surtax

RMD Age Is 73 By 2033

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 by January 1, 2033.

It’s also worth noting that when the One Big Beautiful Bill Act became law on July 4, 2025, that the historically low tax rates from the Tax Cuts and Jobs Act were “permanently” extended. Before the OBBBA became law, the TCJA was set to sunset after December 31, 2025. But as Martin James, CPA, PFS, shared on America’s Wealth Management Show, the TCJA tax rates being “permanently” extended really just means that there’s no end date for current tax rates. It’s still important to plan for the possibility of higher tax rates in the future.

Marty points out that projecting RMDs should be considered when determining how much you should convert when converting funds from a traditional IRA to a Roth IRA. Make sure to catch the full episode with Marty and Logan DeGraeve, CFP®, as they discuss Roth accounts after the One Big Beautiful Bill Act.

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. To sum it up, a Roth IRA grows, distributes, and passes to the next generation tax-free.

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 the following white papers: our Retirement Plan Checklist, Tax Reduction Strategies, and Roth Conversion Case Studies. Download your copies below!

Retirement Plan Checklist

Tax Reduction Strategies

Roth Conversion Case Studies

As you’re reviewing our white papers, we hope that you’ll begin to see why it’s critical to work with a team of professionals. Taxes can be extremely complex. Again, we strongly believe that the financial planning process should include CPAs that work alongside CFP® Professionals as a part of a financial planning team 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, start a conversation with our team below.

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Resources Mentioned in This Article

Other Sources

[1] https://www.irs.gov/forms-pubs/about-form-8606

[2] https://www.investopedia.com/terms/r/ruleof72.asp

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The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. 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.