Roth IRA — $7,000/year of tax-free retirement money

Created by the Taxpayer Relief Act of 1997 (IRC § 408A) and named after Senator William Roth (R-DE), the Roth IRA is the one account that gives an ordinary household something the ultra-wealthy cannot scale easily: **tax-free income in retirement**. Someone contributing $7,000/year from age 25 to 65 at 7% real returns ends with roughly $1.4 million — all withdrawable state and federally tax-free.

**2025 / 2026 contribution limits (IRS):**

• **2025** — $7,000 ($8,000 at 50+)
• **2026** — $7,000 ($8,000 at 50+)

**2025 / 2026 MAGI phaseouts for direct contribution:**

• **2025 single** — phaseout $150,000 → $165,000; no direct contribution above $165k.
• **2025 married filing jointly** — phaseout $236,000 → $246,000; no direct contribution above $246k.
• **2026** figures indexed; confirm with IRS at the time of contribution.

Above the phaseout, use the **Backdoor Roth** strategy (see additional option, future session): non-deductible Traditional IRA contribution → immediate Roth conversion. Legal, widely used, requires clean pro-rata-rule compliance (no pre-tax IRA balances).

**The five mechanics that matter:**

1. **Contributions come out any time tax- and penalty-free.** The IRS tracks basis separately — you can withdraw the principal at any age. Only EARNINGS are subject to the 5-year + age-59½ qualification rules. Effectively: the Roth IRA doubles as a backup emergency fund for contributions made (though treating it that way wastes compounding).

2. **5-year rules.** Earnings qualify for tax-free withdrawal only after (a) 5 years since your FIRST Roth contribution + (b) age 59½ (or death, disability, or first-home purchase up to $10k). Each Roth conversion starts its own 5-year clock — relevant for the Roth Conversion Ladder.

3. **No required minimum distributions (RMDs).** Unlike traditional 401(k) / IRA accounts which must distribute starting at age 73 (or 75 under SECURE 2.0 for those born in 1960+), the Roth IRA has NO RMDs during your lifetime. A Roth inherited by a non-spouse still falls under the SECURE Act 10-year rule — the money must come out within 10 years — but it comes out tax-free.

4. **Spousal Roth.** A non-working or low-earning spouse can contribute to their own Roth IRA based on the working spouse's earned income, up to the $7,000 limit — effectively doubling household Roth capacity. Widely missed by families with one earner.

5. **Contributions until filing deadline.** You can contribute to a prior-year Roth IRA up until the April filing deadline. A 2025 contribution can be made anytime before April 15, 2026.

**Where to open one:** Fidelity, Schwab, and Vanguard all offer zero-fee Roth IRAs. Fidelity's "zero" mutual funds (FZROX, FZILX) let you build a three-fund portfolio with zero expense ratio. Vanguard is the classic choice; Schwab's is functionally equivalent. Robo-advisors (Betterment, Wealthfront) work too if you want automated rebalancing.

**What to hold inside it:** long-duration growth assets. The tax-free-compounding wrapper is wasted on bonds (low expected returns) or cash. Priority: US total-market + international + small-cap value tilt. The Roth is the right bucket for **asset location** (see additional option) — put the highest-expected-return, highest-dividend-yield assets here.

**Common missed moves:**

• **Not contributing in a year you could have.** The $7,000 limit is use-it-or-lose-it. Skipped years never come back.
• **Keeping Roth in cash or a target-date fund inside a bank IRA.** Bank IRAs are usually CD-based at 3–4%; brokerage IRAs can be invested in equities at long-run 7%+. Move it.
• **Forgetting the spousal Roth.** The non-earning partner's contribution room is often left on the table.
• **Over-contributing at income cliffs.** If you contributed early in the year and your MAGI exceeds the phaseout by year-end, you need a corrective distribution (or recharacterize to Backdoor Roth).

**Sequenced priority (from FOO):** Roth IRA is step 6, after employer match (step 2) and HSA (step 5). Roth first if you have NO HSA (non-HDHP), since step 5 doesn't apply.