what’s a Roth ira? Do I need one?
When you think of a retirement or savings account, one cannot help but think of the traditional 401k that most workplaces offer towards your retirement. However, the retirement account no one talks about is the Roth IRA account, which offers more flexibility.
What is a Roth IRA?
A Roth IRA is a special type of retirement savings account where you put in money that’s already been taxed (after-tax dollars).
The big advantage is that your money grows tax-free and, when you retire, you can withdraw it tax-free, including the earnings. That means all the interest, dividends, or investment growth you earned in the account is not taxed when you take it out.
Contribution Limits (2024)
If you're over 50, you can contribute up to $7,000 per year.
As a married couple, both partners can contribute, so you can put away up to $14,000 combined ($7,000 each).
To contribute, you need earned income (like wages or self-employment income). So, if only one spouse works, they can contribute for both through a spousal Roth IRA as long as they file taxes jointly.
Income Limits (2024)
If your combined income (called Modified Adjusted Gross Income - MAGI) is under $228,000 (for a married couple filing jointly), you can contribute the full amount.
If your income is between $228,000 and $243,000, the amount you can contribute starts to reduce.
If you earn over $243,000, you can’t contribute directly to a Roth IRA, but there’s a workaround called a backdoor Roth IRA (contributing to a traditional IRA first and then converting it to a Roth IRA).
Expected Returns
The return on a Roth IRA depends on the investments you choose. For example:
Stock-based portfolios might earn 7-10% annually over the long term.
Bond-heavy portfolios are more conservative and might return 3-5% annually.
You get to choose how aggressive or conservative you want to be based on your risk tolerance and time until retirement.
Benefits Over a Traditional 401(k)
Tax-Free Withdrawals:
With a Roth IRA, you don’t pay any taxes on your money when you withdraw it in retirement
With a 401(k), your contributions are pre-tax, meaning you pay taxes on the money when you take it out in retirement (including all your earnings).
No Required Minimum Distributions (RMDs):
Roth IRAs don’t have required minimum distributions (RMDs), so you can leave the money in the account as long as you want. This means more flexibility with your retirement planning and the ability to let your money grow longer.
401(k)s require you to start withdrawing money at age 73, whether you need it or not, and you pay taxes on it.
Tax Diversification:
Having both a Roth IRA (tax-free withdrawals) and a 401(k) (taxed withdrawals) in retirement can give you more control over your taxable income. You can choose to withdraw from the Roth IRA when you want to minimize your taxable income.
Estate Planning:
With a Roth IRA, your heirs can inherit the account and still get tax-free withdrawals, which can be a significant benefit for passing wealth to your family.
Why Choose a Roth IRA?
If you believe you’ll be in a higher tax bracket when you retire, it makes sense to pay taxes now (with a Roth IRA) and avoid higher taxes later.
It offers flexibility, with no mandatory withdrawals and tax-free growth, which can be powerful if you want to let your investments compound for decades.
Who Should Consider a Roth IRA?
Younger investors who expect to be in a higher tax bracket in the future.
People who want tax-free income in retirement.
Retirees or those nearing retirement who want flexibility in when and how they access their money.
Anyone who wants to leave a tax-free inheritance to their heirs.
The Roth IRA is an excellent tool for long-term tax-free growth, and its flexibility makes it a great complement to a traditional 401(k) in a retirement strategy.
