Life gets busy, and investment advice can sound like buzzing in your ears after a while. That’s especially true if you’re starting out and learning the ropes. At some point, terms like asset allocation, capital expenditure, and depreciation give you a headache. It’s a lot to take in.
Here, we’re diving into Roth IRAs, a retirement plan that can easily be confused with traditional retirement accounts. Specifically, we’re identifying the perfect candidate for Roth IRAs and how they might benefit from the features associated with a Roth. If any of the following three situations apply to you, a Roth IRA may be a perfect fit for your portfolio.
You’re currently in a low tax bracket
Why a Roth IRA makes sense: With a pre-tax retirement plan like a traditional IRA or 401(k), you don’t pay taxes on money contributed or earned until you withdraw it. A Roth IRA is different. Taxes are due on the funds now, but as long as you’ve had the Roth IRA for over five years and are over 59½, no taxes will be due when the money is withdrawn.
Let’s say you’re just starting your career or building a business that has the potential to take off like a rocket. If you suspect that you will be in a higher tax bracket down the road, contributing now to a Roth IRA means you’ll pay a relatively low rate now compared to later. Later, when you earn more, your tax rate will naturally increase.
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You’re laser-focused on saving
Why a Roth IRA makes sense: No matter how well you plan for retirement, it’s difficult to know how much you will need to cover everyday expenses and deal with inflation. There’s little chance you’ll ever think you saved too much, but it is possible to believe you didn’t save enough. Each time you add something new to your retirement nest, you take a step to care for your future self.
If you’re saving every dollar possible and already contributing the maximum to a retirement plan, a Roth IRA allows you to save even more, and in a tax-advantaged manner. How much you can contribute to a Roth annually depends on these two factors:
- For 2025, single filers must have a modified adjusted gross income (MAGI) of less than $150,000 to contribute the Roth IRA maximum of $7,000, or $8,000 for those age 50 or older.
- For married couples, the income limit is $236,000 to make the full contribution.
Even if you’re over the income limit and can’t make the full contribution to a Roth IRA, there’s no downside to adding one to your portfolio.
You’re nearing retirement
Why a Roth IRA makes sense: With most retirement accounts, you must take your first required minimum distribution (RMD) by April after the year you turn 73. The same is not true of Roth IRAs.
If you’re a Roth IRA account owner, RMDs won’t apply in your lifetime. While they are required for beneficiaries who inherit your Roth, it’s not an issue you’ll have to deal with.
That’s a benefit if you have judiciously saved, have more than enough guaranteed income coming in each month, and are unlikely to need to make regular withdrawals. In this case, a Roth IRA gives you the freedom to decide when you want to pull money from your retirement account and when your best move is to let it ride.
While other accounts allow you to save and invest more for retirement, a Roth IRA can be an excellent addition to your portfolio, giving you options you won’t find in more traditional accounts.
