One of the most important retirement savings decisions you'll have to make in 2024 is where to stash your cash. This determines how much you can set aside each year, what you'll be able to invest in, and when you'll pay taxes on your money.
There are several options to choose from, but one of the most popular is a Roth IRA. Here are four reasons you may want to open one this year.
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1. You'll improve your retirement readiness
Arguably, the most obvious benefit of stashing money in a Roth IRA is that you'll improve your preparedness for retirement. You can put up to $7,000 here in 2024 if you're under 50 or $8,000 if you'll be 50 or older by Dec. 31. This could grow to be worth tens or hundreds of thousands of dollars by the time you retire.
However, keep in mind that not everyone can contribute to a Roth IRA. High earners who wish to save in one of these accounts must stash their cash in a traditional IRA and then do a Roth IRA conversion. This is known as a backdoor Roth IRA.
2. You'll get tax-free retirement withdrawals
You fund Roth IRAs with after-tax dollars. This means you pay taxes on your contributions in the year you make them. That's different from most other retirement accounts, where you get an upfront tax break when you contribute to them.
Once you're at least 59 1/2 and have had your Roth IRA for at least five years, you can withdraw your contributions and earnings penalty-free at any age. This can significantly reduce your tax bill in retirement.
3. You have complete control over your investments
When investing in a 401(k), you're usually limited to a handful of investment options your employer chooses for you. These may not always be the ones that best suit your investment strategy, and they may have costly fees. But there's not much you can do about this.
Roth IRAs give you the freedom to invest your money in pretty much anything. You can even invest in individual stocks. You're also able to change your investment strategy as often as you need to.
4. You can skip required minimum distributions (RMDs) in retirement
Roth IRAs are one of the few retirement accounts that don't have required minimum distributions (RMDs). These are mandatory annual withdrawals that all seniors must make beginning in the year they turn 73.
They're not a huge concern for everyone, but for some, they could raise their tax bill. With Roth IRAs, you can leave your money to grow in your account until you're ready to use it, or pass it along to your heirs after your death if you don't need it.
If any of the above perks appeal to you, a Roth IRA might be a good choice for your money this year. And if not, weigh the perks and drawbacks of traditional IRAs or 401(k)s to see if one of these accounts is a better fit for you. You could always spread your money between several accounts as well. Just make sure you understand the rules and contribution limits for each account so you don't run into trouble with the IRS.
