Roth IRAs have been around for more than 20 years, and many people may have forgotten or never learned about how valuable they can be. Even small contributions over time can translate into a substantial amount of tax-free income throughout your retirement.
Ultra-high-net-worth individuals may wish for more tax-free income potential, but they often earn too much income to be able to contribute directly to a Roth IRA. For the rest of you, don’t miss out on the valuable tax-planning opportunities available with a Roth IRA.
The Basics You Need To Know About A Roth IRA
The Roth IRA is a type of retirement account. Unlike a traditional IRA or 401(k), you will not receive a tax deduction when you make contributions, but your money will grow tax-free. It can be withdrawn tax-free during retirement, assuming you follow a few Roth IRA rules.
With an ever-expanding federal deficit, locking in more tax-free income options in the future could be the difference between running out of money in retirement and maintaining financial freedom as you age.
Roth IRA Comes With Income Limitations
Hey, procrastinators. You can still contribute to a Roth IRA when you are filing your taxes for the previous year. The deadline for most California residents to file their 2024 taxes is October 15, meaning you can still potentially open and fund a Roth IRA for last year.
The sooner your Roth IRA contribution is made, the further into the future your potential investment earnings will be sheltered from taxation. What’s better than a huge income in retirement? A huge tax-free retirement income stream.
For 2025, if you are married and filing jointly, each spouse can make a full $7,000 Roth IRA contribution if they have an AGI (adjusted gross income) of less than $236,000. For singles, the number is slightly lower at $150,000. Note that a marriage penalty is in effect here. I’m just saying.
If your income is close to the threshold limits above, consider saving the $7,000 throughout the year into a regular investment account. Then, use those funds to contribute the maximum amount allowed to a Roth IRA when filing taxes. I find it is often easier to come up with money over a year’s time versus scrapping together a large lump sum at tax time.
The Longer You Have A Roth IRA, The More Benefits You Can Accrue
There are two ways a Roth IRA gets better the longer you have it. First, there is an allowable catch-up contribution of $1,000 per year for those who have reached 50 years old—bringing the total contribution to $8,000 per year. Secondly, the longer you hold a Roth, the more you can contribute over time. The more you contribute and the longer you leave the funds in the Roth IRA, the more time compounding interest has to expand your account values.
Roth IRA For Spouses
Even if your spouse doesn’t have earned income, you may still be able to open a Spousal Roth IRA. Whether your life partner is a stay-at-home parent or just between jobs, a spousal contribution will allow your household to contribute to the non-earning spouse. This, of course, assumes you qualify for contributions based on the aforementioned household income limits.
Benefit To Ignore: Easy Access to Money
For those new to investing and saving for retirement, tying up your money until you retire may be intimidating. You may need access to this money in case of an emergency. Roth IRA owners can withdraw their contributions after they have been in the account for five years, for any reason, without owing taxes or penalties. I mention this as a nice, friendly kick in the butt to make sure you get started saving NOW.
There is no excuse for not planning for the future. I suggest ignoring the benefit of having easy access to your money because if you use this account as a piggy bank, you will likely never accumulate enough wealth to achieve financial independence, let alone maintain a basic standard of living in retirement. Bottom line – you can touch the money, but don’t.
The Roth IRA Five-Year Rule
To have full access to your “tax-free withdrawal,” you need to fulfill the five-year rule. This rule means you can’t withdraw your earnings, tax-free, without owing taxes for at least five years from the beginning of the tax year for which you made your first Roth IRA contribution. This applies even if you are older than 59.5.
Double Tax Benefit For Certain Roth IRA Contributions
This is not some obscure tax loophole for the super-rich. For once, there is a tax benefit exclusively for those in the lower income tax brackets. As I mentioned above, you don’t get a tax deduction when you contribute to a Roth IRA, but you also don’t have to pay taxes when you make withdrawals in retirement.
There is an additional tax benefit for low-income workers who are savvy enough to make Roth IRA contributions. This bonus comes in the form of the saver’s credit. If, in 2025, you make less than $39,500, single, or $79,000 as a married couple, you could potentially receive a tax credit for 10-50% of your contributions to a Roth IRA. This credit is a dollar-for-dollar reduction of the taxes you owe. For those who don’t owe taxes, you can receive the credit as a refund.
Put more plainly, you could potentially get a tax credit for your Roth IRA contributions and still make withdrawals in the future tax-free.
How You Can Become A Roth IRA Millionaire?
Just for illustration, if you were to contribute $7,000 to a Roth IRA from the age of 22 until 70, how much money do you think you would have? You would have contributed $336,000, which is not a small amount of money. Assuming a 10% annual return, your Roth IRA could potentially be worth $6,721,000. Keep in mind this money can be withdrawn tax-free. If this isn’t motivation to start a Roth IRA today, I don’t know what is. The earlier you start investing for retirement, the more likely you are to become a Roth IRA millionaire.
Consider A Roth 401(k) For Larger Contributions
If you are earning more than, say, $70,000 and aren’t already independently wealthy, you will need to be saving more than the Roth IRA contribution limits to reach financial freedom. See if your employer offers a Roth 401(k) option, which will allow you to contribute $23,500 in 2025. You may also receive employer matching contributions and be eligible for catch-up contributions if you are age 50+ or the newer additional catch-up contribution for those just age 60-63.
High-Income Earners Should Look At The Mega Backdoor Roth
To contribute even more to a Roth 401(k), consider the Mega Back Door Roth strategy. This could push your Roth contributions each year up to $70,000. This is before any additional Roth catch-up contributions you may be eligible for.
Read more about the Mega Back Door Roth Tax-Free Income Strategy Here.
There is no better day than today to get started on the road to financial freedom. Hopefully, you are already working with a fiduciary certified financial planner to help develop a plan to make sure you are on track for your various financial goals. Part of that plan should be to help ensure you are paying the least amount of taxes over your lifetime. I don’t know when taxes will increase, but they will eventually have to rise, and your Roth IRA accounts can help you mitigate the impact of these future tax hikes.
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