Why This Top Retirement Account Makes More Sense Than Ever

If you want to retire rich, you need to take matter into your own hands. Rather than counting on Social Security and your employer to help you with your retirement, it's essential to save your own money and build a nest egg you can use throughout your golden years.

Fortunately, the federal government gives you huge tax incentives to save for retirement. One of the biggest is the Roth IRA, which gives investors a chance to set money aside without any tax implications whatsoever, reaping the benefits of tax-free income and gains that can last for decades. Moreover, thanks to the positive impacts of tax reform measures that took effect for the 2018 tax year, contributing to a Roth could make more sense than ever for many taxpayers. Let's look more closely at how Roth IRAs work and how you can use them to your advantage.

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The basics of contributing to Roth IRAs

You have to have earned income to contribute to a Roth IRA. Earned income is defined as money you receive either in wages or salaries as an employee or as net profit from a self-employed occupation. For the 2018 tax year, contribution limits are $5,500 for those younger than 50 or $6,500 for those 50 or older. In 2019, the limits rise to $6,000 and $7,000 respectively. If your earned income is less than those contribution limits, then you can only contribute up to your earned income amount.

In addition, you must meet requirements for maximum adjusted gross income. If your income's too high, then you won't be able to contribute the full amount, and those with high enough incomes can't contribute to Roth IRAs at all. Here are the limits for the 2018 and 2019 tax years:

Data source: IRS.

How it works is that if your income is below the lower end of the range, you can contribute the full amount. Those whose income falls above the top end of the range can't contribute to a Roth at all. In between, your maximum contribution is prorated. So for instance, if you're single, under 50, and have $127,000 in adjusted gross income in 2019, then you'd be able to contribute $4,000 to a Roth IRA in 2019. That's because your income falls one-third of the way up the range, so you lose one-third of your maximum contribution. A third of $6,000 is $2,000, leaving you with a $4,000 maximum.

Right now, you have a golden opportunity with a Roth, because you can make contributions for both 2018 and 2019. The deadline for 2018 contributions is April 15, 2019, but you have until early 2020 to get a contribution in for the 2019 tax year.

Here's why Roths are smarter than ever

The benefit of a Roth IRA is that you get tax-free treatment for your retirement assets. Even when it comes time to make withdrawals, you won't have to pay taxes on the money you take out of your Roth IRA -- as long as you do so once you've hit full retirement age.

Compared to other retirement accounts, though, there is a trade-off with Roth IRAs. You don't get the same upfront tax deduction that traditional IRAs and 401(k) plans offer. That means paying more tax now in exchange for tax-free treatment later.

Tax reform made that proposition more favorable for Roths by lowering the current tax rate on income. Most people saw reductions of anywhere from one to four percentage points in their marginal tax rate, which means that the current tax break you'd get from choosing a traditional IRA over a Roth is that much less than it was for the 2017 tax year. Even beyond the math, the peace of mind of knowing that you won't have to come up with a way to pay any taxes on your retirement withdrawals is worth it for many.

Lower tax rates are here, but they might not last long. Looking at a Roth IRA right now makes a lot of sense, because the cost of obtaining those huge tax breaks in the future might never be this low again.