When someone asks me when they should start saving for retirement, my usual answer is: "Right now. It's never too early or late to start."

People with a 401(k) plan through their job are fortunate enough to passively save and invest for retirement. For those without access to a 401(k) -- or simply looking for an alternative retirement account -- look no further than a Roth IRA.

Though less popular than a 401(k), a Roth IRA can be just as powerful of a resource when used the right way.

The words retirement planning written in black marker on a blank white page of a notebook.

Image source: Getty Images.

The freedom of investment options

A Roth IRA is a retirement account that allows you to contribute and invest after-tax money and then receive tax-free withdrawals in retirement. Unlike a 401(k), a Roth IRA isn't tied to your employer, allowing for more flexibility in how you use your account.

To begin, a Roth IRA allows you to invest in any individual stock or exchange-traded fund (ETF) you want. The same can't be said about a 401(k), where your investment options are provided to you. This usually limits you to your company's stock, market cap-based funds, and target date funds that automatically rebalance to become more conservative as you near retirement.

Having the chance to invest in any stock you want lets you tailor your investments to ensure they match your investing goals, risk tolerance, and preference.

If you're an investor that likes to invest in younger, high-growth companies or focus mainly on dividend-paying stocks, you'll likely find a 401(k) limiting, for example.

A great way to avoid Uncle Sam

One drawback of a Roth IRA is the relatively low annual contribution limit. In tax year 2023, the most you can contribute to a Roth IRA is $6,500, or $7,500 if you're age 50 or older. Regardless of how low the annual limit may seem, it can pay off over time, especially with tax-free withdrawals.

Imagine you invest $500 monthly (just under the annual limit) and average 8% annual returns. The shows roughly how your investments would stack up at different years, rounded to the nearest thousand.

Years Invested Personally Invested Investment Value Capital Gains
20 $120,000 $274,000 $154,000
25 $150,000 $438,000 $283,000
30 $180,000 $679,000 $499,000

Data source: Calculations by author.

I included capital gains in the chart because that's where the magic of a Roth IRA comes into play.

If you made those investments in a regular brokerage account, you'd owe taxes on any capital gains. Assuming you've held the investments for over a year, you'd likely owe 15% on the capital gains. That's around $23,100, $42,450, and $74,850 owed, respectively.

In a Roth IRA, however, all the money would be yours tax-free, assuming you've met other requirements like being 59 1/2 years old and having your account for more than five years.

Take advantage while you're still eligible

Unfortunately, not everyone is eligible to contribute to a Roth IRA because of its income limit.

In tax year 2023, single taxpayers with a modified adjusted gross income (MAGI) under $138,000 can contribute the full amount to a Roth IRA. Married taxpayers who file jointly must have a combined income below $218,000 to contribute the maximum.

Once you exceed these income limits, the amount you can contribute is less. If your MAGI reaches $153,000 or above for singles ($228,000 for married couples filing jointly), you cannot contribute to a Roth IRA at all.

It's best to take advantage of a Roth IRA if you're still eligible because that may not always be the case. Even if you're currently eligible and eventually cross the income threshold, your investments will continue to (hopefully) grow and compound until you make withdrawals in retirement.

If you're over the income limit and still want to take advantage of a Roth IRA, you can go the backdoor Roth IRA route. A backdoor Roth IRA isn't an official retirement account; it's a method used to get around the Roth IRA income limit. You can do so by first contributing to a traditional IRA (which has no income limit) and then converting that traditional IRA to a Roth IRA.