Finding cash to save for retirement can be a challenge, but it's only half the battle. You also have to decide where to put that money so it can work best for you. There are plenty of great options out there, but one of the most popular is a Roth IRA.
These accounts offer unique tax advantages you won't find with most other retirement accounts. Here are three ways it could make your senior years a lot easier.
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1. No taxes on withdrawals
The biggest benefit of Roth IRAs is the tax-free withdrawals they offer you in retirement. You can take as much out of these accounts as you'd like each year, and the government will act as though those withdrawals didn't happen when it calculates your tax liability for the year.
Theoretically, you could avoid taxes entirely in retirement if you had all Roth savings. But even if you only keep a portion of your cash in a Roth IRA, you can still reduce your tax bill.
2. No taxes or penalties on contributions at any age
You pay taxes on your Roth IRA contributions in the year you make them. As a result, the government enables you to withdraw them tax- and penalty-free at any age. This is a huge plus for those who need money in a pinch and those who hope to retire early.
The rules are different for earnings, though. If you attempt to withdraw Roth IRA earnings before you've had your account for at least five years or while under 59 1/2, you could owe taxes. Those under 59 1/2 will also face a 10% early withdrawal penalty for withdrawing earnings.
3. No required minimum distributions (RMDs)
Required minimum distributions (RMDs) are mandatory annual withdrawals the IRS forces seniors to take from most retirement accounts beginning the year they turn 73. Roth IRAs -- and as of 2024, Roth 401(k)s -- are the only accounts that don't have these. You can leave your money in your account for as long as you like, even saving it for your heirs after you pass away.
How to get the most out of your Roth IRA
If you believe you could benefit from a Roth IRA, the first step is to open one. Any major broker can help you with this. Once you have your account, you'll have to deposit funds and choose your investments. You may be able to set up automatic transfers from a bank account if you'd like.
Keep in mind that Roth IRAs have an annual contribution limit of just $7,000 in 2024 or $8,000 if you're 50 or older. This limit applies to all your IRAs, including traditional IRAs. You cannot put $7,000 in each account this year. Roth IRAs also have income limits that could prohibit high earners from contributing directly to these accounts.
If you'd like to set aside more than the annual limit, you may need to pair a Roth IRA with another account. A Roth 401(k) is a great choice if you have access to one. It's similar to a Roth IRA, but it has higher contribution limits and enables your employer to match some of your contributions if it wants to. However, Roth 401(k)s don't permit penalty-free withdrawals of contributions under 59 1/2 like Roth IRAs do.
You should also note that Roth IRA contribution limits could rise in future years, enabling you to set aside more for your future than you can right now. This is something to keep an eye on if you hope to amass a large amount of Roth savings by retirement.
