Your future self might really thank you for this.
One of the most important retirement savings decisions you'll have to make in 2024 is where to stash your cash. This determines how much you can set aside each year, what you'll be able to invest in, and when you'll pay taxes on your money.
There are several options to choose from, but one of the most popular is a Roth IRA. Here are four reasons you may want to open one this year.
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1. You'll improve your retirement readiness
Arguably, the most obvious benefit of stashing money in a Roth IRA is that you'll improve your preparedness for retirement. You can put up to $7,000 here in 2024 if you're under 50 or $8,000 if you'll be 50 or older by Dec. 31. This could grow to be worth tens or hundreds of thousands of dollars by the time you retire.
However, keep in mind that not everyone can contribute to a Roth IRA. High earners who wish to save in one of these accounts must stash their cash in a traditional IRA and then do a Roth IRA conversion. This is known as a backdoor Roth IRA.
2. You'll get tax-free retirement withdrawals
You fund Roth IRAs with after-tax dollars. This means you pay taxes on your contributions in the year you make them. That's different from most other retirement accounts, where you get an upfront tax break when you contribute to them.
Once you're at least 59 1/2 and have had your Roth IRA for at least five years, you can withdraw your contributions and earnings penalty-free at any age. This can significantly reduce your tax bill in retirement.
3. You have complete control over your investments
When investing in a 401(k), you're usually limited to a handful of investment options your employer chooses for you. These may not always be the ones that best suit your investment strategy, and they may have costly fees. But there's not much you can do about this.
Roth IRAs give you the freedom to invest your money in pretty much anything. You can even invest in individual stocks. You're also able to change your investment strategy as often as you need to.
4. You can skip required minimum distributions (RMDs) in retirement
Roth IRAs are one of the few retirement accounts that don't have required minimum distributions (RMDs). These are mandatory annual withdrawals that all seniors must make beginning in the year they turn 73.
They're not a huge concern for everyone, but for some, they could raise their tax bill. With Roth IRAs, you can leave your money to grow in your account until you're ready to use it, or pass it along to your heirs after your death if you don't need it.
If any of the above perks appeal to you, a Roth IRA might be a good choice for your money this year. And if not, weigh the perks and drawbacks of traditional IRAs or 401(k)s to see if one of these accounts is a better fit for you. You could always spread your money between several accounts as well. Just make sure you understand the rules and contribution limits for each account so you don't run into trouble with the IRS.
FAQs
This is a great option to diversify your tax situation and avoid paying taxes on your investment gains in the future. Not everyone can contribute to a Roth IRA, as income limits determine eligibility. For 2024, the income limits are based on your modified adjusted gross income (MAGI) and your tax filing status.
Is a Roth IRA worth it in 2024? ›
This is a great option to diversify your tax situation and avoid paying taxes on your investment gains in the future. Not everyone can contribute to a Roth IRA, as income limits determine eligibility. For 2024, the income limits are based on your modified adjusted gross income (MAGI) and your tax filing status.
What is the Roth IRA limit for 2024? ›
Roth IRA contribution limits 2024
The Roth IRA contribution limit for 2024 is $7,000 for those under 50 and up to $8,000 for those 50 or older. The cap applies to contributions made across all IRAs you might have.
Why can't rich people use Roth IRA? ›
High earners may be unable to make direct contributions to a Roth individual retirement account (Roth IRA) due to income limits set by the Internal Revenue Service (IRS). A loophole, known as the backdoor Roth IRA, provides a way to get around the limits.
At what age does a Roth IRA not make sense? ›
Are You Too Old for a Roth IRA? There is no maximum age limit to contribute to a Roth IRA, so you can add funds after creating the account if you meet the qualifications. Roth IRAs can provide significant tax benefits to young people.
Are backdoor Roth IRAs allowed in 2024? ›
Another option, if your employer's plan offers it, is the mega backdoor Roth. Under this option you would make after-tax contributions into your employer's 401(k) plan. For 2024 the limit for these after-tax contributions is $46,000.
What is the downside of a Roth IRA? ›
You have to wait longer for the tax-savings payoff with a Roth IRA versus a traditional IRA. You pay taxes on the money before it goes into the account, meaning no tax deduction.
What is the best company for Roth IRA? ›
Best Roth IRA accounts (online brokers)
- Charles Schwab.
- Interactive Brokers.
- Fidelity Investments.
- Vanguard.
- JP Morgan Self-Directed Investing.
- Merrill Edge.
- E-Trade.
- Firstrade.
A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done.
How much can my Roth IRA grow in 20 years? ›
If you contribute 5,000 dollars per year to a Roth IRA and earn an average annual return of 10 percent, your account balance will be worth a figure in the region of 250,000 dollars after 20 years.
THE FINANCIAL SERVICES INDUSTRY HAS OTHER INCENTIVES TO PROMOTE ROTH IRAs. The other incentive financial advisors have to promote Roth IRAs is that most of them make their money via Assets Under Management (AUM). This means that their fee is paid by a percentage of the investments they manage for you.
What income is too high for Roth IRA? ›
The income limits on Roth contributions increased for 2024, which means savers with income at or below $161,000 ($240,000 for married couples filing jointly) can contribute to a Roth IRA.
What is a rich person's Roth? ›
Despite the nickname, the “Rich Person's Roth” isn't a retirement account at all. Instead, it's a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals.
What is the Roth IRA 5 year rule? ›
This rule for Roth IRA distributions stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account tax-free.
When not to do a Roth IRA? ›
If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down. In this case, you're probably better off postponing the tax hit by contributing to a traditional retirement account.
How much tax will I pay if I convert my IRA to a Roth? ›
You'll owe income tax on the entire amount that you convert from a traditional IRA into a Roth IRA in the year you make the switch. The amount of tax will depend on your income tax bracket and income tax rate—between 10% and 37%. 1 The money you convert is added to your gross income for the tax year.
What is the Roth catch up for 2024? ›
Assuming your income is under the IRS income threshold, you could set aside the value of your catch-up contribution to a Roth IRA. For 2023, the annual maximum IRA contribution is $7,500—including a $1,000 catch-up contribution—if you're 50 or older. For 2024, that limit goes up by $500 for a total of $8,000.
What is the Roth IRA limit for 2025? ›
Beginning in 2025, the annual total contribution limits to an IRA will be raised to $10,000 for taxpayers between the ages of 60 and 63. Exceptions for making early withdrawals without a penalty have been expanded.
How much does a Roth IRA grow in 10 years? ›
The Roth IRA annual contribution limit is $7,000 in 2024 ($8,000 if age 50 or older). If you open a Roth IRA and fund it with $7,000 each year for 10 years, and your investments earn 6% annually, you may end up with more than $92,000 by the end of the decade.
Does Roth IRA have a 5 year rule? ›
This rule for Roth IRA distributions stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account tax-free. Keep in mind that the five-year clock begins ticking on Jan. 1 of the year you made your first contribution to the account.
