Contributing to a Roth IRA (individual retirement account) might not be top of mind — especially when you have other financial obligations keeping you up at night. But if you want to unlock a stream of tax-free income during retirement, this retirement account is worth looking into.
The Roth IRA allows you to contribute after-tax dollars so you can enjoy a waterfall of tax-free income during retirement. For 2021, you can contribute up to $6,000 to a Roth IRA if you haven’t turned 50 yet. The contribution caps are sweeter after your 50th birthday. You earn a special $1,000 catch-up contribution, allowing you to stash away a maximum of $7,000.
If you’re wondering if it’s worth your time to max out your 2021 Roth IRA, here are three reasons that might make your decision easier.
Boost your retirement savings
If you’re contributing to a retirement plan at work, you might think you have your retirement goals squared away. But that’s not always the case. Depending on the lifestyle you want during retirement, you might need to save a bit more.
That’s when having a Roth IRA comes in handy. It gives you a chance to save more money toward your retirement goals. If you contribute the maximum, you’ll have more dollars to invest in assets that can grow tax-free. You’ll also boost your retirement-account balance, due to the power of compounding.
Let’s say you’re under 50 and contribute the maximum amount to your Roth IRA. If you make annual contributions of $6,000 and earn a 7% annualized rate of return, your account can reach $100,000 after 10 years if you don’t touch the funds. But if you contribute $3,000 annually, you’ll have a little over $50,000 in your account. As you can see, maxing out your Roth IRA every year can help you achieve your retirement savings goals faster.
If you don’t take advantage of the Roth IRA soon, your income could potentially disqualify you from making direct contributions. High earners have to go through a few loops to get their hands on one. That’s why it’s crucial to load up your Roth IRA with as much money as you can while you meet the requirements.
Fortunately, the IRS has increased income ranges over the years so you have a bit of wiggle room. Also, the IRS will focus more on your modified adjusted gross income (MAGI) to determine if you’re below the income threshold.
For 2021, single filers can earn up to $125,000 and married couples filing jointly can earn up to $198,000 before they’re no longer eligible to make the maximum Roth contributions. As soon as you reach the danger zone, better known as the phase-out range, the maximum amount you can contribute to a Roth decreases. Once you’ve reached the end of the phase-out range, you’ll have to say goodbye to direct contributions to a Roth.
Roth IRA income phase-out ranges
2021 Income Range
2020 Income Range
Single or head of household
$125,000 to $140,000
$124,000 to $139,000
Married filing jointly
$198,000 to $208,000
$196,000 to $206,000
Married filing separately
$0 to $10,000
$0 to $10,000
Increase your tax-free income
Building a million-dollar nest egg is a goal that many people have. Even if you don’t hit the million-dollar mark, you’ll have some tax-free money waiting on you if you have a Roth IRA.
By stashing money away in a Roth, you get your tax obligations out of the way now. You contribute after-tax dollars, invest in assets that grow tax-free, and reap the benefits of tax-free withdrawals later.
Let’s say you start investing early in a Roth IRA and your portfolio grows to $1 million. You can withdraw 100% of your money and keep all the earnings to yourself.
To claim all your tax-free earnings, you need to be at least 59 1/2. You also need to make sure you’ve satisfied the five-year rule. As long as you don’t break any of the Roth IRA rules, you won’t have to worry about splitting any of your earnings with the IRS.
Maximize the Roth IRA while you can
Your timeline to make contributions to a Roth IRA may be dwindling. It’s best to assess your financial situation now to determine how you can make the most of your contributions.
If you’re far away from the maximum contribution for 2021, don’t sweat it. There’s still time to achieve your goal. The deadline to contribute to a 2021 Roth IRA is the tax deadline, which is April 15, 2022. So create a savings plan, aim to contribute the max, and get ready to enjoy more tax-free income during retirement.
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