Here's the Downside of Not Investing Enough in Your Roth IRA in 2023

Back in the day, it was common for people to work for the same employer for decades and collect a pension upon retirement that, combined with Social Security, allowed for a reasonably comfortable lifestyle. But these days, most private-sector employers do not offer pensions. And while Social Security is still around, those benefits generally don't replace a very large portion of workers' pre-retirement earnings.

It's important for anyone working today to save for retirement on their own. Thankfully, certain accounts let you save for retirement in a tax-advantaged manner. And Roth IRAs are one of them.

In 2023, Roth IRA contributions maxed out at $6,500 for workers under the age of 50 and $7,500 for those 50 and over. But maybe you didn't get a chance to max out your Roth IRA in 2023. Or maybe you didn't contribute to one at all. If so, you may have missed a big opportunity to enjoy tax-free investment growth. But the good news is it's not too late to address that.

When you miss out on tax-free gains

With a Roth IRA, your contributions aren't made on a pre-tax basis. However, investment gains in your account are tax-free, and so are the withdrawals you take in retirement. That's huge, because many people end up having to live on less money during their senior years. Not having to pay taxes on that income could lift a big financial weight off your shoulders.

But let's get back to those tax-free gains for a minute, because those have the potential to be really lucrative. Let's say your Roth IRA investments generate an average yearly 8% return, which is a little bit below the stock market's average of 10% over the past 50 years. Had you contributed $5,000 to a Roth IRA in 2023, by 2053, you'd have a little over $50,000. And that $45,000 gain would be yours free and clear of taxes.

That's why passing up Roth IRA contributions any year is a mistake. If you can't swing those contributions due to financial constraints, that's one thing. But if you simply opted out of making Roth IRA contributions in 2023 when you had the money, you may have made a huge mistake -- one that you can thankfully still fix.

You still have time to fund your Roth IRA for 2023

While 2023 might be in your rearview mirror, you should know that for any given year, you have until the following year's tax-filing deadline to finish funding a Roth IRA. So if you didn't max out your Roth IRA in 2023, or you didn't contribute as much as you could've, you have until April 15, 2024, to put money into that account, up to last year's $6,500 or $7,500 limit.

Now, one thing you should know about Roth IRAs is that there's an income limit for being able to make contributions. In 2023, your contributions were reduced as a single tax-filer with an income of $138,000, and contributions were off the table once your income exceeded $153,000. For married couples, in 2023, contributions were reduced at a joint income of $218,000 and off the table for incomes above $228,000.

If you weren't eligible for a Roth IRA in 2023 and therefore didn't fund a retirement plan at all, consider putting as much money as you can into a traditional IRA between now and April 15. Just as you have until the tax-filing deadline to fund a Roth IRA, so too do you get that leeway for a traditional IRA.

While a traditional IRA won't give you tax-free investment gains and withdrawals, you'll get to shield some income from taxes. Plus, you're allowed to convert a traditional IRA to a Roth account after the fact. So all told, if you can max out a 2023 IRA, it pays to do so between now and mid-April, whether it's a traditional IRA or Roth.