How To Invest In A Roth IRA In 2026

**Steve Chen** (0:10)
Hi, I'm Steve, a former public school teacher who now teaches money in an easy to understand way. So why do investment accounts always sound like they were named by lawyers? A Roth IRA feels like something that you only see on a tax form or in a textbook written for accountants. I remember googling it for the first time after high school. I opened a few articles, tried to make sense of all the jargon, and just as quickly, closed all the tabs. Terms like income thresholds and prorata rules made it sound like this account was built for billionaires who treat reading the financial section of the newspaper like a morning workout. But a Roth IRA is one of the simplest retirement tools that regular people can use. You just need to make sure that you follow the exact steps I'll talk about today so that you don't make a tax or investing mistake. So in this video, I'm giving you a guide that I wish I had back then. A straightforward breakdown of how a Roth IRA works, how to open one step by step, and what I would actually invest in if I were starting my $1 million portfolio all over again. So what exactly is a Roth IRA? Now Roth isn't some sort of complicated term for a tax manual. It's actually named after the late senator William Roth, who pushed for a retirement account that let everyday people keep more of their long term gains instead of losing them to yearly taxes. And IRA simply stands for Individual Retirement Account. Think of your Roth IRA as a special account your uncle Roth created because he was tired of watching you spend your money on things that never last. Like that stack of subscription services that you swore you cancelled. He wanted you to save a little bit more for your future, so he built an account that rewards you for doing that. To make it worth your time, he gave it three simple features. First, you get to contribute money that you've already paid taxes on. Second, your investments grow tax free. And third, you can withdraw your contributions anytime without penalties. And that's it. It's a simple tax free account that anyone can use. So here's how it works in real life. Let's say that, I don't know, you're a 25 year old assistant publisher at a mid-sized company and you earn $4,200 a month. Before the money hits your bank account, payroll deducts your taxes. For a single filer earning this amount in 2026, that's roughly $630 a month. You decide to invest 20% of your take-home income, which is around $710 a month, and you look at two choices. First, of course, you invest in a Roth IRA and you put around $710 a month into this account. Let's use a reasonable long-term return of, say, 7 to 12% a year, which is close to a historical average of a diversified stock market index. And after 20 years, you'd roughly have around $370,000. When you withdraw all of that in retirement, you keep all of it. There's no tax bill. Well, alternatively, let's say that you invest in a regular taxable brokerage account. You still invest the $710 a month with the same 7% annual growth, but each year, you pay taxes on your investment gains. For most people, that's around a 15% capital gains tax. After 20 years, then, you'd roughly have around $370,000 on paper, but a portion of your gains get taxed when you sell. That reduces your real total by tens of thousands of dollars. So, when you stack them side by side, a Roth IRA leaves you with significantly more money simply because the growth is tax-free. Now a few factors determine how much you can put into your Roth IRA and whether you directly qualify for this account. First is your age, which will determine your annual contribution limit. If you're under 50, you can add the standard amount. But once you're 50 or older, you qualify for a catch-up contribution, which lets you put in extra money each year. So for example, in 2025, if you were 49, you would be able to contribute $7,000. But if you were 50, you could contribute that $7,000 plus another $1,000 catch-up amount, which is going to be a total of $8,000. This rule exists to help late starters build more savings before retirement, and to give people who had slower financial years a way to get back on track. Maybe they were, I don't know, raising kids, dealing with job changes, or addressing medical bills. And they're only able to start saving and investing now, hence the catch-up amount. Each year, the IRS reviews inflation and overall income trends and decides whether to address the limits. And that's exactly what happened again. So, for 2026, anyone under 50 can contribute up to $7,500, and if you're 50 or older, your catch-up bumps your limit to $8,600. Looking at past updates, the catch-up contribution usually holds steady at around $1,000, while the base limit either stays the same or increases in around $500 steps. Another factor is your income. The purpose of the Roth IRA is to give middle-income earners a way to grow their money without worrying about taxes every time their investments go up. For 2026, if you earn under $165,000 as a single filer, you can contribute the full amount. If your income falls between $165,000 to $180,000, you still qualify, but your limit gradually phases down. But what if you earn more than $180,000? So there is actually a legal workaround called the Backdoor Roth IRA. And again, yes, it's legal and it's widely used by high-income earners. So you basically open a traditional IRA, deposit the money into your traditional IRA, and then you immediately convert that money to your Roth IRA. So for example, let's say that you're a, I don't know, a 30-year-old software engineer making $190,000, which is going to put you above the limit for direct contributions. But you can still put the 2026 maximum $7,500 into a traditional IRA and convert it right away inside your brokerage app. It's usually just a button that says convert to Roth, or you can call your brokerage to help you out. Now, this is really important. If you do decide to use the backdoor Roth IRA, just make sure that you first ask your tax professional about the pro-rata rule and double check that form 8606 is filed. This protects you from accidentally getting taxed twice and keeps your conversion clean. And as easy as that, your money grows tax-free in a Roth IRA. Now, your spouse also affects your approach to a Roth IRA. The IRS actually allows a married couple to fund a Roth IRA for a non-working or low-income spouse using a spousal Roth IRA. Now, it's not one shared account because, you know, an IRA is an individual retirement account. It's actually two individual IRAs funded with the working spouse's income. So as long as your combined income is under $240,000 in 2026, both partners can contribute up to their full limits. And just like individual accounts, high-earning couples can also use the backdoor method if they're above the limit. Now this setup helps build couples build two separate retirement accounts, grow their savings faster, and give a non-working spouse long-term financial independence. So yes, almost anyone with earned income can use a Roth IRA. The limits and possibilities depend on your age, income, and whether you're married. The only real restriction is that you must have earned income. So in other words, if you're extremely rich and you're living off of dividends or investment gains, you actually won't have access to a Roth IRA even through the backdoor method. Otherwise, almost everyone over 18 years old can take advantage of Uncle Roth's special account. Oh, and by the way, if you're a beginner confused with all of these ETFs and you don't want to put off investing anymore, I actually organize everything in my free money cheat sheet. You get to compare all the different ETFs with each other and see how you can allocate your portfolio based on your risk tolerance within your Roth IRA. If you want it, I'll leave the link down below. Now that you understand how a Roth IRA works, how do you open one up without making any mistakes? The first step is to choose where your Roth IRA is going to live. So, in my opinion, Fidelity and Schwab are the two most trusted options for Beginners because they have low cost, easy apps, and strong customer service. But really, whichever one you choose, just make sure that you understand how they charge fees. Both Fidelity and Schwab charge $0 in account fees for a Roth IRA and $0 in trading commissions for stocks and ETFs. Where they earn money is through small fund expenses inside the ETFs you buy. These expense ratios are usually between 0.01% and 0.10% for broad index funds. So for example, if you invest, I don't know, $500 each month at Fidelity into an S&P 500 index fund with a 0.02% expense ratio, then you'll pay about $2 per year for every $10,000 you have invested. In exchange, the brokerage maintains the account, execute your trades, keeps your money protected, and connects you with thousands of investments. Once your brokerage account is set up, you'll open your Roth IRA inside the app. Depending on your income and family situations, you'll choose one of the three setups. First is the individual Roth IRA. Pick this if you're under the income limits and just want a clean, straightforward setup. If both you and your spouse earn an income, this lets you max out your own Roth IRA and grow your retirement buckets in parallel. And if you're single, this is the simplest way to start building long-term, tax-free growth. Second is the, of course, spousal Roth IRA. You can go with this if one of you isn't earning that much right now. It lets your household save more than you otherwise could, and it keeps the non-working spouse building their own retirement money instead of falling behind. And if you don't use this option, you basically miss out on an entire Roth contribution every year. Third is the backdoor Roth IRA. If you or the two of you together earn above the limits, this keeps the door open. You still get money into a Roth and still get that tax-free growth, but you just basically take a different route to get there. Now, if you open the wrong account for your income level, it doesn't necessarily ruin anything, but the IRS will require you to remove or reclassify the excess contribution. And this creates extra paperwork and you could owe penalties if you let it sit too long. Opening the correct account from the start avoids all of that and keeps your progress clean and simple. Next, you want to set up automatic monthly contributions. I really believe that this is one of the most reliable ways to stay consistent. And without this, it's too easy to second-guess your budget each month. You tell yourself you are going to invest $200, but then something comes up, a dinner out, a delivery order, a new game, and suddenly the month is gone. Your Roth IRA has a yearly contribution limit, so the sooner you get a rhythm going, the better. If you just turn 50 in 2026, your annual limit is $8,600. That comes to about $716 per month. If you automate this amount, then you'll get the benefit of your catch-up contribution. Compare this to someone who contribute whatever they feel like each month, maybe $200 one month, and then maybe another $50 the next. 40 years from now, the automated investor could retire with hundreds of thousands more because consistency compounds just as much as the money does. Automatic contributions also create your first investing strategy, dollar cost averaging. This means you buy the same investment on a regular schedule no matter what the market is doing. Sometimes, you'll buy at a high price, sometimes at a low price, but over the years, you end up with a steady average. Now, this is a strategy that helped me build my first million dollars, and it works because it removes emotion from the process. And if you can't commit to the full monthly amount yet, there's still flexibility. You can actually continue contributing for the previous year until the tax filing deadline in April. So if you're watching this in 2026, you can still contribute for the year of 2025 up until the tax date in April. Those extra months give you room to catch up without losing your progress. Fourth, you need to buy assets. This step is usually the step that most beginners forget. They open the accounts, automate their deposits, and assume that they're investing. But until you choose what to invest in, your money just sits in cash, earning almost nothing. So for this, you need to head into the trade or invest section of your Roth IRA and choose the assets you want to buy. A classic example of using a Roth IRA to its full potential is Peter Thiel, one of PayPal's founders. He bought early into PayPal shares inside his Roth IRA. And as the company grew, those shares ballooned into billions of tax-free dollars. This happened because the growth happened inside the Roth, and ProPublica even dubbed him Lord of the Roths. Now, most of us won't have access to early stage startup shares, but we can use the same principles with ETFs or exchange-traded funds. These are bundles of companies packaged into one single investment. So when you buy a share of an ETF, you're buying small pieces of many companies all at once. ETFs reduce your risk because if one company struggles, others in the fund can balance it out. Teal made billions when PayPal succeeded, but if PayPal had failed, he would have lost everything. An ETF actually spreads that risk across hundreds of companies. My personal favorite ETFs for a Roth IRA are the ones that track the S&P 500 These include big names like VOO, SPY, SPYM, and IVV. They're all well diversified, historically steady, and a great place for long-term growth. And really, the ETF that you choose is completely up to you. And honestly, this is where investing gets a little fun. You get to explore different funds, see how they've performed over time, and make a decision that directly shapes your financial future. And if this podcast helped you, it would be so awesome if you could take 30 seconds to send it to someone and give us a positive review so more people can find it. My team and I try our best to create as much free and helpful content as possible, and it would mean the world to us. Thanks, everyone. I love you all, and I will see you all in the next one.