How Does a Roth IRA Grow and Build Wealth?

Peter Richardson is a vice president of Planning Excellence at Northwestern Mutual.

There’s a reason a Roth IRA is a popular retirement savings tool. It gives you access to a wide range of investments and tax-free distributions in retirement. Roth IRAs also use the power of compound interest to grow your nest egg—but choosing the right investments is key.

We’ll help you understand how a Roth IRA works and why it can be a good retirement savings option, especially if you’re young and just starting to save.

How does a Roth IRA work?

A Roth IRA is a type of individual retirement account (IRA) you can use to save for retirement. Contributions to a Roth IRA are made after tax, which means you pay income taxes on the money you contribute in the year it’s earned. Unlike traditional IRA accounts, contributions to Roth IRAs are not tax-deductible because you pay taxes on the contributions up front. However, after funds are contributed to a Roth IRA, they are never taxed again—including when you withdraw money in retirement.

If you’re young and in a lower-income bracket, a Roth IRA can be especially attractive. You’ll pay taxes on your contributions now, when you’re likely in a lower income bracket, and not pay taxes later, when your income (and tax rate) will probably be higher.

There are other types of IRAs you can use to save, too. With a traditional IRA, you contribute pretax dollars, so you pay taxes on the withdrawals. You’re also able to deduct a portion of your contributions to a traditional IRA, so there are other tax benefits to contributing to one.

Whether a Roth IRA fits in your retirement plan will depend on what else you’re doing to save. If your employer offers a Roth 401(k), for example, you may be able to reap tax benefits there while also nabbing an employer match. It’s important to look at your plan as a whole when deciding how to save for retirement.

How does a Roth IRA grow?

There are generally two ways to grow the balance on your Roth IRA: by making contributions and by investing those contributions. Here’s how it works:

Contributions

When setting up your Roth IRA, you’ll decide how often to make contributions and how much you want them to be. It may seem fairly obvious, but your Roth IRA is designed to get bigger as you put more money into it over time, but its value can rise and fall with the market.

In 2026, the contribution limit is $7,500 per year to any IRA—traditional or Roth. (Folks who are 50 or older can kick in an extra $1,100, for a total of $8,600.

However, if your income is above a certain amount, you may not be able to make contributions to a Roth IRA, or your contribution limit may be reduced. In 2026, your eligibility to contribute to a Roth IRA will begin to phase out once your income hits $153,000 for single filers and $242,000 for married couples filing jointly. Single filers making more than $168,000 ($252,000 for those married filing jointly) can no longer contribute to a Roth IRA at all. (If that’s your situation, talk with your financial advisor about other ways to invest.)

Investment gains

When you contribute to a Roth IRA, you can use your contributions to purchase a variety of investments—including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more. If these investments make money in the form of interest or dividend payments, your savings will continue to grow over time.

Your IRA can also earn money if you sell assets in the account for more than you paid for them. This is an example of capital gains.

As long as you make a qualified distribution (which for most people means waiting until age 59½ to withdraw earnings), you won’t have to pay taxes on any investment gains in your Roth IRA. But if you pull earnings out early, withdrawal rules may mean you’re subject to tax and an early withdrawal penalty, depending on how you plan to use them.

How much does a Roth IRA grow in a year?

It depends on market conditions and the investments you hold in your Roth IRA. Holding more stocks than bonds could lead to faster growth, but you’re also assuming more risk. The right investment mix (or asset allocation) for you will depend on your risk tolerance and goals. With that said, since 1970 the S&P 500 has had an annualized total return of over 10 percent, and a well-diversified portfolio can often see average annual gains in that ballpark.

How does compound interest work with a Roth IRA?

As you invest in a Roth IRA, you’ll earn interest on both your principal balance and interest that’s already accrued in the account. That’s called compound interest—which gives growth on growth. Any dividends you deposit and any increase in your investment value will also earn compound interest. All in all, using an account like this can put some serious muscle behind your retirement savings.

Let’s say you put $500 per month into a Roth IRA for the next 30 years. You will have contributed $180,000 total—but if you get a 6 percent annual return, your balance could be north of $500,000 in 30 years. Because this is a Roth account, that entire amount is yours to keep in retirement.

What other retirement accounts can I use with a Roth IRA?

A Roth IRA can help grow your retirement savings, but relying solely on it can have limitations. Its lower contribution limits make it difficult to save as much as you’ll need, and high-income earners may not be able to contribute directly at all.

A good retirement plan will rely on a mix of financial options—playing on the strengths of each. Here are some other retirement savings accounts you might use alongside a Roth IRA to build compound interest and supercharge your savings.

401(k)

A 401(k) is an employer-sponsored investment account that allows you to contribute up to $24,500 per year. This limit is increased to $32,500 if you’re 50 or older, and if you’re 60, 61, 62 or 63, you can contribute up to a total of $35,750. Unlike a Roth IRA, the money you put into a 401(k) is tax-deductible, which can reduce your taxable income while you’re still working. However, you’ll be taxed on withdrawals you make in retirement. (Your company may also offer a Roth 401(k), in which contributions are taxed and withdrawals down the road could be accessed tax-free.) A 10 percent penalty applies to distributions taken before age 59½.

With slight differences in investment options and in who can use them, 403(b)s and 457(b)s work very similarly to 401(k)s.

A traditional IRA

As with a 401(k), distributions from a traditional IRA count as taxable income. Your contributions may also be tax-deductible. In 2026, you can contribute up to $7,500 across all your IRAs (including Roth IRAs) each year. That number jumps to $8,600 if you’re 50 or older. Taking money out of a traditional IRA before age 59½ will trigger a 10 percent penalty.

Nonqualified (after-tax) accounts

This type of investment account doesn’t offer the tax advantages of a 401(k) or IRA, but it can provide a source of income in retirement. You can open a brokerage account to buy and sell all kinds of securities. Just be aware that you’ll be taxed on gains during the year they’re realized. The upside is that there are no withdrawal limitations or penalties. In addition to a brokerage, you could work with a financial advisor to manage your investments for you (meaning they’ll make decisions on your behalf).

Your Northwestern Mutual financial advisor can provide personalized guidance based on your risk tolerance and financial goals. They can also help you see how a Roth IRA fits into your overall investment plan. As your financial co-pilot, our advisors consider how your money can grow—and how to protect it with insurance.

This publication is not intended as legal or tax advice. Financial representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.