Why Contribute to a Roth IRA?

As retirement approaches, many feel concerned about their long-term financial security. One way to improve your retirement security is to contribute to a Roth IRA.

A Roth IRA is a retirement account that allows you to contribute after-tax dollars now, and take tax-free distributions later on during retirement.

A Roth IRA can be a good choice to boost retirement savings for several reasons:

1 - Tax-free distributions in retirement

This is particularly valuable if tax rates increase in the future.

The table below compares current federal tax rates vs. the federal tax rates that are scheduled to go into effect in 2026 unless congress extends tax cuts passed in 2017.

2 - No Required Minimum Distributions

Unlike traditional IRA withdrawals, which are subject to required minimum distributions (RMDs) at age 73, Roth IRA withdrawals are not subject to RMDs. This means that you can let your money continue to grow tax-free for as long as you'd like.

3 - Estate Planning Advantages

Beneficiaries of inherited Traditional IRAs are forced to distribute the full account balance within 10 years of the date of death of the original IRA account owner. Distributions count as taxable income, which can increase tax liability for beneficiaries.

Beneficiaries of inherited Roth IRAs also have to distribute the full account balance within 10 years of the date of death of the original IRA account owner. However, these distributions are tax-free. This is a clear win for beneficiaries of inherited Roth IRAs vs. inherited Traditional IRAs.

Income Limits

For tax year 2022, Modified Adjusted Gross Income must be below $204,000 for married couples and $129,000 for single filers to be eligible to make a full Roth IRA contribution.

For tax year 2023, Modified Adjusted Gross Income must be below $218,000 for married couples and $138,000 for single filers to be eligible to make a full Roth IRA contribution.

Contributions Limits

For tax year 2022, individuals age 50+ can contribute a maximum of $7,000 into a Roth IRA or 100% of earned income, whichever is less.

For tax year 2023, individuals age 50+ can contribute a maximum of $7,500 into a Roth IRA or 100% of earned income, whichever is less.

Married couples can both contribute up to the maximum levels stated above.

A non-working spouse can also contribute the maximum to a Roth IRA if the working spouse is earning more than 2x the annual Roth IRA contribution. For example, the working spouse must be earning above $14,000 for tax year 2022 for both the working spouse and the non-working spouse to be eligible to contribute the full $7,000 each into Roth IRAs.

Contribution Deadlines

You have until April 18th, 2023 to make a Roth IRA contribution for tax year 2022.

You have until April 15th, 2024 to make a Roth IRA contribution for tax year 2023.

Summary:

Roth IRAs are a good way to boost retirement savings due to tax-free growth, no Required Minimum Distributions at age 73, and estate planning advantages.

As of the time this article is published, you have a few days left to contribute into a Roth IRA for tax year 2022 if you're eligible (see income limits above).

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This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures