Saving for retirement is something you should aim to do consistently. The more time you give your money to grow, the larger a nest egg you're likely to end up with.
Plus, you should plan on needing income outside of Social Security once your career wraps up. Those benefits will only replace about 40% of your pre-retirement wages if you're an average earner, and most seniors need a lot more income than that to live comfortably. (Also, Social Security benefit cuts could be coming, which means you'll especially need savings of your own to compensate.)
When it comes to building retirement savings, there are different plans you can choose from. But here's why it pays to focus on funding a Roth IRA in 2023.
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1. Contribution limits are up
Right now, contributions for both traditional and Roth IRAs max out at $6,000 for savers younger than 50 and $7,000 for savers 50 and over. In 2023, these limits are rising by $500 each. And while that's not a huge increase, it's a nice bump that allows you to sock away a little extra for retirement in a tax-advantaged account.
2. You'll enjoy tax-free withdrawals in retirement
You might be finding that money is tight these days due to inflation. But money could end up getting even tighter once you retire and stop bringing home a paycheck.
The upside of keeping your savings in a Roth IRA is that you'll get to take withdrawals from that account tax-free later in life. And not having to pay taxes on a chunk of your retirement income could spare you a world of financial stress.
3. You can avoid required minimum distributions
Most tax-advantaged retirement plans make you take required minimum distributions (RMDs). That means you can't just leave all of your money to sit and enjoy tax-advantaged growth indefinitely.
Roth IRAs, however, don't impose RMDs. And that gives you a lot more flexibility. You can even choose to leave a portion of your nest egg behind to your heirs if you please.
4. You can build a portfolio that works for you
When you save for retirement in a 401(k) plan, you're generally limited to a handful of funds to choose from. With an IRA, you have the option to choose individual stocks. And that could help you build a portfolio to meet your goals and even outpace the broad market.
Plus, by having more choices, you can potentially keep your investment fees lower. And not having those fees eat into your returns could result in more long-term wealth.
You might have a host of retirement savings plans available to you in 2023. But favoring a Roth IRA could work to your benefit. And remember, if your income is too high to contribute to a Roth IRA directly, you can always put money into a traditional IRA and simply convert it to a Roth after the fact. Doing so, however, will mean paying taxes on that conversion, so if that's a route you intend to take next year, you may want to talk it over with a tax professional.
