Should I invest in a Roth IRA?

There are so many ways to save today that it can be daunting to comprehend which is best for you. Today, I’m going to remove some of the mystery about the Roth IRA. This is something I had never heard of until I married into a family with two CPA parents! A Roth IRA is simply an account you can use to allow your investments to grow tax-free until retirement. You can open one at almost any investment firm. Nowadays, lots of employer 401k plans have Roth (aka post-tax) options associated with them as well. There’s a lot to uncover about this particular investment vehicle, but let’s start by looking at eligibility.

Who is eligible to contribute to a Roth IRA?

There are income limits set by the IRS for contributing to a Roth IRA. In the tax year 2023, a person can contribute to a Roth IRA as long as their income is under $153,000 if single or less than $228,000 if married filing jointly. If your income is under $218K (married filing jointly) or under $138K (single), you can contribute the full amount of $6,500 per year per person. If you’re over the age of 50, add an extra $1,000 to that. This means most Americans are eligible to contribute to a Roth IRA.

Another great benefit is if you are married filing jointly, both spouses can contribute the full amount into a Roth IRA, even if only one spouse works. For up to date information on how much you can contribute, click here for the current IRS rules.

It should be noted that even if you aren’t eligible to contribute to a Roth IRA, you can still contribute to a Roth 401k (or the like), if it is an option at your company. There are no income limits on 401k contributions and the limit is higher.

Drawbacks to contributing to a Roth IRA

1. There are no built-in tax savings for the current tax year. Unlike traditional IRA contributions or pre-tax 401k contributions, you will pay taxes on the dollars you contribute into a Roth IRA.
2. You can only contribute up to a certain threshold. For 2023, it’s $6,500/person. If you desire to save more, you have to find other vehicles in which to do so.
3. Not everyone is eligible. If you’re not eligible, there are some ways to back-door a Roth, which I’ll cover in a coming post.
4. While you can withdrawal contributions, you can’t withdrawal earnings until age 59.5. Use funds you don’t plan to access for a while.

Benefits to contributing to a Roth IRA

1. Any withdrawal at retirement is tax-free. The tax savings at retirement could be huge.
2. Similar to the last, but slightly different, your account grows tax-free. This means if you put $5 in a Roth IRA, let it grow to be $5,000, and then take it out, you never pay taxes on the gains of your investment!
3. Depending on your income, you may be able to qualify for the Saver’s credit for your contribution. Just remember to look at the income brackets, as not all people who can contribute to the Roth qualify for this added credit.
4. No required RMDs. Unlike traditional IRAs and 401k plans, there are no required minimum distributions on a Roth IRA account. This means you don’t have to withdrawal a certain amount each year from your retirement account as deemed by the government, so as not to pay a penalty.
5. You may be able to contribute to both a Roth IRA and a Roth 401k. It’s not an either/or situation if you meet the required income limits for the Roth IRA.
6. Future withdrawals by beneficiaries won’t be taxed.

My personal feelings on Roth IRA

As my husband and I have continued to save for the future, we like this retirement vehicle for saving funds. Because we are not in a high income bracket right now, it doesn’t “hurt” that much to pay taxes on our contributions. That money continues to grow tax-free. Someday, our tax bracket may increase, but we will have already paid the taxes. I also love the idea that someday, my kids won’t have to pay taxes on income I stashed away. It seems the benefits outweigh the drawbacks for our family and current financial situation. While I’m not a financial advisor, I think the majority of Americans would benefit from taking advantage of this one. Your future self will thank you!