Making regular retirement contributions is important if you hope to enjoy a comfortable lifestyle after leaving the workforce. But equally as important is where you keep your savings. You want an account that will help you grow your wealth over time while providing you with tax benefits that enable you to keep more of your earnings in your pocket.
Your best retirement account depends on the options available to you and how you think your income will change between now and retirement. But a Roth IRA is a pretty solid option for a lot of people. Below, we’ll take a look at why.
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They’re pretty accessible
You can open a Roth IRA on your own and contribute to it on your schedule. This makes it a great option for those who don’t have access to a workplace retirement plan. Even if you do, you might still prefer the option of contributing when and how much you’d like to a Roth IRA, rather than withholding money from each paycheck.
You can contribute up to $6,500 to a Roth IRA in 2023 (or $7,500 if you’re 50 or older) as long as you meet two criteria. First, you have to earn enough during the year to cover all your Roth IRA contributions. And second, you have to earn less than the Roth IRA income limits. High earners may still be eligible to contribute a reduced amount to one of these accounts. Or they can do a backdoor Roth IRA, where they contribute money to a traditional IRA and do a Roth IRA conversion in the same year.
As long as you check those boxes, you can stash a few thousand dollars here for your retirement. This could grow into tens of thousands of dollars after a few decades.
Forget about paying taxes in retirement
Roth IRAs allow you to make tax-free withdrawals in retirement, but there are a few conditions. First, you have to pay taxes on your contributions upfront. This could mean a higher tax bill for you right now. But it could still save you a lot compared to paying taxes on your contributions and earnings in retirement if you expect your tax bracket to stay the same or rise over time.
You can withdraw contributions tax-free at any age. However, you must wait until you’re at least 59 1/2 and have had your account for at least five years before you can withdraw earnings tax- and penalty-free.
Once you meet these requirements, your money is yours to use as you wish. The government won’t force you to take it out at a certain age to pay taxes on it, like it does with other retirement accounts. You can leave it there as long as you’d like. And when you do take cash out, the government won’t count it against you when calculating your tax bill.
You can invest how you want
Roth IRAs give you greater freedom to invest your money how you’d like than workplace retirement plans do. 401(k)s, for example, usually limit you to a handful of investments your employer has selected. These may not suit your risk tolerance, and they could have high fees that eat into your profits.
But there are far fewer rules about what you can invest in with a Roth IRA. You can invest in individual stocks if you feel comfortable doing so. Or you can opt for an index fund. This can diversify your portfolio quickly, and most don’t charge you much in fees either.
A Roth IRA may not be enough on its own, especially if you plan to set aside a large sum for retirement this year. But with so many perks, it’s definitely worth parking some of your cash here if you think it makes sense for you financially. If you max it out, you can always switch to a workplace retirement plan or even an HSA until the end of the year. Then, you can return to your Roth IRA in 2024.