Why this 1997 rule change might be the single best savings decision you ever make
By Stephen Jones · Jones Financial Partners · 5 min read
What if you could set aside money today, watch it grow for decades, and then pull it all out in retirement without owing the IRS a single dollar? It sounds like a loophole — but it's completely legal, has been on the books since 1997, and goes by a name you've probably heard: the Roth IRA.
Despite being nearly 30 years old, the Roth IRA has only recently exploded in popularity, especially among younger savers. If you've been curious what all the buzz is about, here's everything you need to know.
How the Roth IRA Actually Works
The traditional IRA and 401(k) work on a simple premise: contribute pre-tax dollars now, get a deduction this year, and pay taxes when you withdraw in retirement. The Roth IRA flips that model entirely.
You contribute after-tax dollars — money you've already paid income tax on. That money grows tax-deferred inside the account, and when you take distributions at age 59½ or older, every penny comes out completely tax-free. No exceptions, no fine print.
Senator William Roth of Delaware championed this idea, and Congress passed it into law as part of the Tax Relief Act of 1997. It's widely considered one of the best retirement vehicles ever created for American savers.
2026 Contribution Limits — and the Income Catch
You can't contribute unlimited amounts. For 2026, the limits are:
- Under age 50: $7,500 per year
- Age 50 or older: $8,600 per year (thanks to a $1,100 catch-up contribution)
These limits are indexed to inflation and have risen steadily over time — they were around $5,000 a decade ago.
There's also an income ceiling. If you earn too much, you're phased out entirely:
- Single filers: Phase-out begins around $150,000, complete phase-out around $168,000
- Married filing jointly: Complete phase-out around $252,000
If you're over the income limit, don't worry — there are still legitimate ways in.
Three Ways to Get Money Into a Roth
1. Direct Contribution — the simplest route if your income qualifies.
2. Roth 401(k) — many employers now offer a Roth version of their 401(k), 403(b), or 457 plan. These have no income limits and much higher contribution maximums. If your employer offers one, it's worth a serious look.
3. Roth Conversion — you can convert existing pre-tax IRA or 401(k) money into a Roth by paying income tax on the amount converted. The key is to pay that tax bill from your regular savings, not from the conversion itself. That way the full amount stays in the Roth and continues compounding.
"If you convert $100,000 and pay the taxes out of your savings, that $100,000 invested in a Roth IRA at 7% average returns over 20 years becomes roughly $380,000 — completely tax-free. Compare that to $380,000 in a taxable account where you realistically own 75–80 cents of every dollar."
Conversions work best in years when your income is lower — a job transition, early retirement, or a down year in business. Converting in a high-income year risks pushing you into a higher tax bracket, which can erase much of the benefit.
4. The Backdoor Roth — this one sounds sketchy. It isn't. If your income exceeds the Roth IRA limits, you can make a non-deductible contribution to a traditional IRA (filing a special form with your CPA to waive the deduction), then convert that contribution to a Roth the very next day. Since there's been no growth and no deduction taken, there's virtually no tax owed. Repeat every year.
Two Big Advantages You Might Not Know About
No Required Minimum Distributions (RMDs). Traditional IRAs and 401(k)s force you to start withdrawing money at age 73 — whether you need it or not — because the IRS wants its share of the tax deduction you took decades ago. The Roth IRA has no such requirement. Your money can keep growing as long as you live.
A powerful estate planning tool. When a non-spouse (a child, grandchild, sibling) inherits a Roth IRA, they receive it tax-free and have 10 years to distribute the funds under the SECURE Act 2.0. Contrast that with inheriting a traditional IRA, where every distribution is taxable income to the beneficiary during that same 10-year window. For families thinking about generational wealth transfer, the difference can be enormous.
Don't Overlook the HSA — a "Super Roth"
If you have a high-deductible health plan, the Health Savings Account (HSA) deserves a place alongside your Roth IRA. Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. That's a triple tax advantage.
For 2026: $4,400 for individuals, $8,400 for families. These limits are separate from your Roth IRA limits, so you can max out both. Invest the HSA funds beyond the required $1,000 cash minimum into index funds and let them grow alongside your retirement savings.
The Bottom Line
The Roth IRA remains one of the most powerful tools in personal finance — especially for younger savers who have decades for tax-free compounding to do its work. The math gets more nuanced as you approach peak earning years, but even then, it can be a remarkable wealth-transfer vehicle for your family.
Whether you're just starting out or looking for smarter ways to position your retirement assets, it's worth a conversation with a financial advisor to see how the Roth IRA — and strategies like conversions, the backdoor Roth, and HSAs — fit your specific situation.
Watch the Full Video
Prefer to learn by watching? This post is based on a full video breakdown by Stephen Jones. Check it out here:
▶️ The Roth IRA Explained — YouTube
Have questions or topics you'd like to explore? Send your thoughts to Stephen Jones at stephenjonesfinancialpartners.com. Every message is read personally.
Limitations and Early Withdrawals: Some IRA's have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRA's and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 2, may be subject to an additional 10% IRS tax penalty. Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services LLC nor any of its representatives may give legal or tax advice.