A Roth IRA is one of the best ways to save for retirement. While the money you invest in a traditional IRA or a 401(k) plan is tax deductible this year, you cannot take a tax deduction on money you contribute to a Roth IRA.
So why is a Roth better?
With other retirement accounts, you’ll need to pay income taxes on the money you withdraw from the account later on. But with a Roth—because you didn’t take a deduction on the money you put in—you won’t owe taxes on the money when you withdraw it in retirement. That means true tax-free income in retirement.
That’s better for two reasons:
- If you’re an aggressive saver, you’ll most likely be in a higher tax bracket in retirement than you are now. So instead of saving say, 20 percent on taxes now, you might save 30 percent on taxes later.
- The tax code will likely change many times before you retire. And while anything’s possible, it’s likely tax rates will go up, not down.
If you can get your money into a a Roth IRA, you’ll be saving responsibly for retirement. I recommend investing up the limit every year, and doing so as early on in the year as possible so that you’re maximizing the amount of tax-free interest you’re collecting.
What’s the downside to a Roth IRA?
In the financial planning world, the Roth IRA is almost too good to be true. Because the tax benefit on a Roth is so great, the IRS places two limitations on Roth accounts.
- There is a limit on how much you can contribute by year.
- High-income tax payers have a reduced amount they can contribute to a Roth, or may be excluded from contributing to a Roth altogether.
This chart explains Roth IRA income limits and contribution maximums for the 2023 tax year.
2023 Roth income and contribution limits
|Filing Status||Income Limit||Contribution Limit|
|Single||Less than $138,000||$6,500*|
|$138,000 – $153,000||A reduced amount**|
|$53,000 & up||Ineligible for Roth IRA|
|Married – Filing Jointly||Less than $218,000||$6,500*|
|$218,000 to $228,000||A reduced amount**|
|$228,000 & up||Ineligible for Roth IRA|
|Married – Filing Separately||$0 to $10,000||A reduced amount**|
|$10,000 & up||Ineligible for Roth IRA|
*See details of your contribution limit here.
**Figure your reduced contribution limit with this worksheet provided by the IRS.
Roth IRAs are a great start, but there’s more to do!
At MU30, we want you planning responsibly for the future, and Roth IRAs are a great place to start.
But Roth IRAs are like an empty bucket. You need to actually invest the money you contribute into the Roth IRA for it to grow. Most investment houses will have Roth IRA accounts, from credit unions to stock brokers. But once you put money into your Roth IRA, you have to decide what to do with it.
We have a few recommendations for you to consider when deciding where to invest your Roth IRA.
The most simple option is to choose a robo-advisor like Wealthfront. The robo-advisors are low-cost investment platforms because they rely heavily on trading algorithms. If you feel more comfortable in the stock market and want more freedom to select individual stocks, explore major companies. But don’t forget to diversify!