If you’ve opened a Roth IRA, you’ve already laid the foundation for one of the most important pieces of your life: putting money away for your post-working years.
However, opening a Roth IRA is only the first step to a smart retirement saving strategy. To maximize its advantages, you need to focus on maximizing your contributions. Hitting that threshold looks different depending on your age: If you’re under 50 in 2024 and 2025, you can contribute up to $7,000. If you’re 50 or older, you can put in an extra $1,000 as a catch-up contribution for a total of $8,000.
Optimizing your Roth IRA to its fullest potential could be a smart approach to retirement planning. (You may want to consult with a financial advisor to help you figure out the right approach for your specific financial situation.)
A Roth IRA offers you the opportunity to save a considerable sum for your golden years and enjoy the benefits of tax-free withdrawals in retirement. Roth IRAs also provide a variety of investment options, and you have the flexibility of passing on the IRA to your heirs, who will receive it free of tax (as long as they don’t withdraw from the account before it is five years old).
However, depositing money in a Roth IRA will not give you the immediate rush of a tax break. Since your contributions are not tax-deductible — regardless of income or whether you have a retirement plan at work — you might be tempted to use that money for other purposes.
But if you can afford to max out your Roth IRA, waiting for the delayed gratification of tax-free withdrawals in retirement can prove to be one of your smartest financial decisions. Consider these seven reasons.
7 reasons to max out your Roth IRA
1. With no requirement to withdraw funds, this can act as your longevity insurance
One of the unique benefits of a Roth IRA is what it doesn’t have: a requirement to begin taking money out at a certain age. With other tax-deferred options like a traditional IRA or a 401(k), account holders must begin taking money out by age 73.
Think about your family history. Is one of your grandparents still alive at age 90? While the average American has a life expectancy of about 77.5 years today, keep in mind that advances in medicine can increase that typical time frame. A Roth IRA gives you a pool of money that you can hold off on dipping into until you think the time is right. No matter what age you are now, the much older version of yourself will be thankful for those maximum contributions.
2. Contributions can benefit your heirs, too
You might never need to actually use the money in your Roth IRA, which means that your heirs will be the ones thanking you for your decision to max out your contributions.
Your heirs will typically need to withdraw the money over a 10-year period following your passing (though there are exceptions), but their withdrawals will be tax-free since it is a Roth IRA.
3. Since the rules can change in the future, it’s crucial to make the most of the current potential
There’s no guarantee that you’ll be able to contribute to a Roth IRA in future years. Congress could consider lowering the annual income limits and making other changes, limiting who can convert a tax-deferred retirement account to a Roth IRA or restricting the ability to use a backdoor Roth IRA, for example. So, while the benefit is here, don’t let it slip away.
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4. Tax rates can always change, too
You can’t predict what tomorrow will look like, but you can take steps to protect yourself against higher taxes. By maxing out your contributions each year and paying taxes at your current tax rate, you’re eliminating the possibility of paying an even higher rate when you begin making withdrawals. Just as you diversify your investments, this move diversifies your future tax exposure.
5. You’ll have a realistic picture of your retirement budget
What you have accumulated after taxes is what really counts. After all, that’s what will pay your bills. That’s one of the key benefits of the Roth IRA.
Because the entire amount is yours, you have a real understanding of your future finances. The same cannot be said for your tax-deferred 401(k) or traditional IRA, which will involve sharing some of the proceeds with Uncle Sam.
6. This year’s contributions are a long-term growth opportunity
Between worries about inflation and concerns about the stock market’s volatility, you might be concerned about buying too high. However, maxing out your contributions is not a one-and-done strategy.
Ideally, you will contribute to your Roth IRA this year, next year and for many years to come. And when you begin to withdraw funds, you’ll likely draw it down over an extended period of time. So, don’t worry about what the market does today or tomorrow — spend time thinking about how your investments will look much farther down the road.
7. This cash can act as a last-resort backup for your emergency fund
Since you’ve already paid taxes on the money you’re contributing to your Roth IRA, there are no taxes or penalties for withdrawing the money you’ve contributed — at any time, for any reason.
If you wind up encountering a serious emergency that completely drains your primary emergency fund (remember, that first emergency fund is absolutely essential to your financial well-being), the money contributed to your Roth IRA (but not the investment earnings) is one additional buffer against major money troubles.
However, the “last” in last resort can’t be stressed enough. Withdrawing from a Roth IRA is a one-way street. You’re not granted higher annual contribution limits in future years to make up for it later. Instead, any early withdrawals represent a permanent setback to your retirement planning.
When to make your IRA contributions
The calendar year might be wrapping up, but you have extra time to maximize your Roth IRA contributions. You can make 2024 contributions until Tax Day in mid-April 2025, while you’ll have until Tax Day 2026 to make your contributions for 2025. If you haven’t yet hit your annual maximum, keep your focus on the rearview before looking ahead to next year’s limits.
Working with a financial advisor can help you plan a contribution strategy that sets you up well for your retirement.
Bottom line
Maximizing your contributions to a Roth IRA can greatly benefit your retirement planning and provide peace of mind for the future. With the potential for tax-free withdrawals, the ability to pass on the account to heirs and the flexibility to use it as a last-resort emergency fund, it can be a smart financial decision. So, make sure to prioritize contributing to your Roth IRA and plan ahead for a secure and comfortable retirement.
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