A Roth IRA is perhaps the most powerful retirement savings account you can own. Once your money is in the account, it can grow tax-free in your Roth IRA for the rest of your life. If you do choose to withdraw money from your account once you qualify, those withdrawals are also tax free. On top of that, the withdrawal rules for a Roth IRA are such that money you directly contributed to a Roth IRA can be taken out at any time, for any reason -- with no taxes or penalties.
If there's a downside to Roth IRAs, it's that your annual contributions are limited. For most people under age 50, the annual limit is $6,500 in 2023, and for those age 50 or above, that limit is $7,500. If your income is high enough (or if you're married and file separately), even those fairly modest contribution limits get reduced. Because of those tough contribution limits, the Roth IRA can quickly become one excellent retirement savings account you'll wish you opened sooner.
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The power of compounding over time
The table below shows just how far that $6,500 per year can grow over time, based on the number of years you are able invest a new $6,500 and the rate of return you earn on your money.
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
45 |
$5,140,169 |
$2,713,269 |
$1,465,802 |
$818,158 |
|
40 |
$3,164,536 |
$1,818,576 |
$1,066,309 |
$642,372 |
|
35 |
$1,937,824 |
$1,209,663 |
$767,785 |
$497,889 |
|
30 |
$1,176,132 |
$795,248 |
$544,710 |
$379,134 |
|
25 |
$703,181 |
$513,203 |
$378,016 |
$281,526 |
|
20 |
$409,516 |
$321,248 |
$253,452 |
$201,299 |
|
15 |
$227,173 |
$190,607 |
$160,371 |
$135,359 |
Calculations by author. Assumes investment at the beginning of each year and smooth compounding.
As you can see, if you start early enough in your career and invest consistently enough, you can potentially reach multimillionaire status based on your Roth IRA alone. That's an incredibly compelling reason to start a Roth IRA early, but there are other reasons as well.
Get money into your account while you can
Direct contributions to a Roth IRA are limited by your income. If you're single, your ability to contribute to a Roth IRA starts to phase out once you earn $138,000 or more. If you're married and filing jointly, it starts phasing out with a household income of $218,000 or more. If you're married and filing separately, your ability to contribute to a Roth IRA starts phasing out immediately, unless you happen to have not lived with your spouse at all throughout the year.
Once your income gets high enough, you can only get money into a Roth IRA through a backdoor Roth IRA contribution or through another rollover technique from a different retirement account. Those can be tricky, can get expensive, and if rolling over from an active employer plan, will require your employer to allow in-service distributions, which not all do.
People's incomes frequently increase as they get more experienced in their careers, so chances are you'll be unable to make those direct contributions due to your income.
You can't immediately withdraw much of your money, either
Roth IRAs also have a couple of five-year timers you need to be aware of. The first is that in order to take your earnings out of your account tax- and penalty-free, you have to have funded your Roth IRA account for at least five years (and be at least age 59 and a half).
The second is that if you get money into your Roth IRA by rolling it over from a traditional IRA or traditional 401(k), that money needs to sit in your account for at least five years. If you don't let it sit and are under age 59 and a half, you'll pay a penalty if you try to withdraw that rolled-over amount.
Those five-year timers also make it important to get money into your Roth IRA sooner rather than later. After all, the sooner those timers start, the sooner they expire.
Get started now
A Roth IRA can be an incredibly powerful tool when it comes to investing for your retirement, and the sooner you get your money into one, the harder the account can work for you. Whether it's because you want your money to compound tax-free for longer, you're worried you'll lose the ability to contribute, or you want to get those five-year timers moving as quickly as possible, it typically makes a ton of sense to start funding a Roth IRA as quickly as you can. So get started now, and reduce the pain of regret you'll end up with if you continue to wait.
