Save early, save often, and save as much as you can. That's a sure-fire formula (as surefire as it gets) for achieving your retirement goals.
Of course, savings alone won't do it. Interest rates paid on savings accounts simply don't produce over the long run like investing in the stock market. Either way, perhaps the single-best way to save and invest for retirement is with a Roth IRA.
IRA stands for individual retirement account, and they're all tax-advantaged. The big difference with Roth IRAs is that they are funded with after-tax dollars, and withdrawals later are tax-free. Traditional IRAs are funded pre-tax, and you must pay taxes on withdrawals.
Harness tax-free growth -- the sooner, the better
Roth IRAs are named after the late Delaware Senator William Roth, and they're a powerful way to grow your savings tax-free over long periods. The earlier you start contributing, the more time compounding has to do its magic.
For example, currently, if you open a Roth IRA at age 30 and contribute $1,200 a year for 30 years, assuming a conservative 6% average annual return, you would have about $95,000. Make that $6,500 a year, and your investment is now worth about $515,000. And, again, you're not paying taxes on withdrawals.
The reason I chose age 30 and 30 years is because of the penalties for early withdrawals before age 59 and a half, a stipulation that Roths share with traditional IRAs. There is also a five-year holding period required for the tax break.
There are exceptions for education, buying a first home, or adopting a child, among others. And $6,500 is the current IRS limit for total contributions to either type of IRA for people under 50. It's $7,500 if you're 50 or older. That extra $1,000 is referred to as the catch-up contribution.
Catching up and continuing to contribute
Even if you got a late start, there are options in addition to the aforementioned catch-up contributions to help you maximize your Roth IRA savings in the years leading up to and after retirement.
There is no age limit for making contributions for either type of IRA, but there are required minimum distribution rules for most retirement accounts that begin at age 72 or 73, depending on when you were born.
For Roth accounts that are part of a 401(k) or 403(b), that's also true. But not for long. Beginning in 2024, like all Roths, even those will not require withdrawals until the owner's death. The rules can be complicated, and we're just touching on them here, but the point remains the same.
Commit to consistently funding your Roth, and you'll likely be glad you did when the time comes. You'll enjoy seeing your nest egg grow while knowing it's there if you need it before you retire, and you will make a huge difference in your life's options when you do leave the work world behind.
Your future will smile upon you
Roth accounts are as widely available as traditional IRAs and offer the same wide range of savings and investment options within the accounts. And you can manage them as actively or passively as you want. You can typically do far worse than simply choosing a big index fund and letting it ride.
Saving for retirement may not seem urgent when you're younger. But your future self will thank your present self if you make it a priority now and stick with those regular contributions. And better yet, max out on them if and when you can.