10 Reasons to Open a Roth IRA Today

A Roth IRA is one of the most powerful tools at your disposal when it comes to saving for your retirement. The long-term advantages of having your money in a Roth IRA generally make it crucial to get as much invested inside one as you can.

The rules around funding them, however, can be a little complicated. For instance, limits on how much you can save inside a Roth IRA and where the money can come from make it important to start early in your career if you want a good chance of building up a large balance. With that in mind, these 10 reasons to open a Roth IRA today just might give you the nudge you need to get started.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

One of the most powerful advantages of a Roth IRA is that money you withdraw once you reach age 59 1/2 can generally be taken out completely tax free. Generally -- but not always. One key rule is that your Roth IRA must be open and funded for at least five tax years before you can make a qualified withdrawal of your earnings.

As a result, you should absolutely get money in your Roth IRA at least five years before you plan to withdraw that money for your retirement. Otherwise, you’ll have to wait to take advantage of one of the best parts of having a Roth IRA -- tax-free withdrawals.

Since money inside your Roth IRA can compound tax free inside that account for your entire life, it makes sense to force that particular five-year clock to run as early as you can. Once that particular five-year deadline passes, then you no longer have to worry about it, even as your money works tax free on your behalf.

ALSO READ: 3 Good Reasons to Max Out Your Roth IRA in 2021

The table below shows how much a single $1,000 investment could potentially grow to become, depending on how long it compounds and what rate of return it earns along the way. What is abundantly clear from that table is that the longer your money is compounding on your behalf, the more it can ultimately end up being worth. That holds true even if you earn a mere 4% return rate -- well below the stock market’s long-term historical average.

The sooner you get money in your Roth IRA, the longer it can compound before you retire, thus giving you that much better a chance to see numbers closer to the top of that table.

Nobody wants to be in a position of owing more than they can pay. Still, the No. 1 driver of personal bankruptcy in the United States is medical debt. If you’re not insured when a major illness or injury happens, or if you find out after the fact that an expensive procedure isn’t covered by your insurance, then you could find yourself in a world of hurt.

Many states protect at least a portion of your IRA assets from creditors. In addition, under federal law, if you’re forced into bankruptcy, most creditors can’t go after the first $1.36 million of your IRA balance. Those protections make your Roth IRA a more valuable place for your money than a standard brokerage account that doesn’t carry such protections.

That gives you a good reason to get money inside your Roth IRA early. That way, if medical debt or some other temporary problem later knocks your finances for a loop, you won’t necessarily have to go back all the way to ground zero if you’re forced to file bankruptcy.

If you are able to directly contribute to a Roth IRA, you can only sock aside up to $6,000 a year in such a plan if you’re under age 50, or $7,000 a year if you’re age 50 or up. The limited contributions mean that if you want to build up a significant balance in your plan, you’ll pretty much have to put money in over several years.

The time frame on those limits also mean that if you don’t sock money away when you have the chance for a given year, you lose that chance forever. With 2021 soon to draw to a close, now is a great time to make your Roth IRA contribution if you’re eligible to do so. Generally speaking, you have until the initial due date of your taxes to make a contribution for a given year. As a result, the deadline for a 2021 contribution is April 15, 2022.

ALSO READ: Should You Max Out Your Roth IRA in 2021?

In order to directly contribute to a Roth IRA, your income needs to be below certain thresholds. If you are a single taxpayer, your ability to contribute starts to phase out if your income is above $125,000 and is completely eliminated above $140,000. If you’re married and file jointly, the phaseout range begins at $198,000 and runs to $208,000. If you’re married and file separately, the phaseouts start at any income, and with income above $10,000, you’re no longer able to contribute.

If your income is above those levels, you might be able to get money into a Roth IRA via something known as a backdoor contribution. That technique can be a little complicated to execute, and the taxes involved can get steep if you already have a significant balance in traditional-style IRAs. Because of that complexity and tax risk, it makes sense to directly make Roth IRA contributions when your income allows.

As a result, if you expect your income may grow in future years to where a direct contribution is out of reach, it makes sense to start making Roth contributions while you still can. Once your money is properly in your Roth IRA, it can stay there, even if your income skyrockets in later years.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Whether you are looking to directly contribute to a Roth IRA or are making a backdoor contribution, that money needs to start off its life as taxable compensation. Essentially, it needs to be money you earn from working at a for-hire job, as a contractor, or from the salary portion of what you earn by running your own business.

Even if you’re ultimately funding your Roth IRA by rolling over money from a 401(k) or other employer-sponsored retirement plan, that money started out as tied to your compensation. As a result, if you want money in a Roth IRA, you’d better either contribute directly to one or to an account you can ultimately roll into one while you’re still gainfully employed. If you lose your job or retire, your ability to get new money into any sort of retirement plan will likely end along with your paycheck.

So look to get money into your Roth IRA while you’ve got a job, and thus can get money in there.

Roth IRAs have always had income limits for making direct contributions. Until 2010, there were also income limits associated with rolling money into Roth IRAs from other accounts. Indeed, it used to be that if your income were over $100,000, you could not roll money from another plan into a Roth IRA.

Congress is seriously considering reinstating income limits on Roth IRA conversions and adding other restrictions in its 2021 legislation package. Should such provisions make their way into law, you might find yourself in a situation where you’re unable to get money into a Roth IRA either by contribution or conversion.

Despite the potential of those limits coming back, the most aggressive version of that legislation package would have left existing money in most people’s Roth IRA accounts alone. As a result, if you’re worried that Congress might change the law and take away your ability to get money into a Roth IRA in the future, you should get money into one now, while you still can.

ALSO READ: 3 Reasons a Roth IRA Holds 80% of My Investments

Once you turn 72, you are required to take distributions from most qualified retirement plans -- except your own Roth IRA. Those mandatory distributions are generally considered ordinary income when taken from traditional-style retirement accounts.

As ordinary income, it’s subject to income taxes. That income can also increase the taxes that your Social Security income is subject to and raise your Medicare Part B premiums. As a result, if your traditional retirement account balances get big enough, the taxes and costs associated with a mandatory movement of money from one pocket to another can get huge.

To minimize those costs, many people start rolling their traditional retirement account balances into a Roth IRA well before they are subject to mandatory distributions. By doing so, they can have more of their money compounding for longer in the tax-free Roth IRA environment. Yes, they pay taxes on the conversion when they do so, but it’s generally a case of “pay me now or pay me more, later.”

If you’re on track to have a large traditional retirement account balance, you might want to start making Roth IRA conversions sooner, rather than later, in order to reduce those "gotcha" costs for yourself.

Some income tax rates were temporarily lowered by the Tax Cuts and Jobs act of 2017. If the law doesn’t change, those tax rates will increase in 2026 when the temporary rates expire. In addition, President Biden campaigned on raising taxes on at least some Americans, so it is quite possible that some sort of tax hike may head your way before then.

In addition, with inflation spiking, an increase in interest rates may soon follow. Higher rates could easily blow a hole in the federal budget. With the national debt now above $28 trillion, every 1% increase in rates could add over $280 billion in annual interest costs that need to be paid, even if no additional spending takes place.

Because Roth IRAs are funded with after-tax dollars, you’ll likely have to pay taxes on any money you put into a Roth IRA now. Your choice might very well be between paying some tax now on a contribution or conversion versus paying even more tax later on the money you could have had subsequently growing tax free. In that context, getting money into your Roth IRA now makes all that much more sense.

In addition to the five-year clock mentioned in the first point, there is a second five-year clock that you should be aware of when it comes to your Roth IRA. Money you roll into a Roth IRA from another source can be removed from that Roth IRA free from additional taxes or penalties once it sits in the Roth IRA for at least five years. That feature enables an early retirement technique known as a Roth IRA ladder.

In essence, you convert money from a different retirement plan to your Roth IRA, pay any conversion taxes you may owe, and then let it sit there for five years. After that, you can take the entire amount you converted -- but not any growth on it -- out, completely tax and penalty free. Do one conversion every year to cover your living expenses and taxes, and after you build up five years of them, you can tap your retirement money for spending cash without penalty, no matter what your age.

It does take five years for that Roth IRA ladder to be useful. As a result, if you’d like to take advantage of it, the sooner you start those conversions, the sooner you can start spending the money you’ve worked all those years to save. That makes this yet another reason to open and fund your Roth IRA today.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

With so much of the Roth IRA’s structure tied to calendar deadlines and waiting times, it makes sense to open and start funding a Roth IRA as soon as it becomes feasible.

To make a conversion to a Roth IRA count for 2021, it needs to be completed by Dec. 31, 2021. To make a contribution to a Roth IRA count for 2021, it needs to be completed by April 15, 2022. To make the clock start counting on any of the Roth IRA’s five-year rules, your money needs to be in the account by the relevant contribution or conversion deadline.

That ever-ticking clock -- along with Congress’ ability to change the rules as it sees fit -- makes today a great day to open and figure out a plan on how to fund your Roth IRA. So get started now, and put yourself on the path to a more financially comfortable future.

The Motley Fool has a disclosure policy.