Roth IRAs might seem less appealing than a 401(k) at first glance. They have lower contribution limits — just $7,000 for adults under 50 compared to $23,000 for 401(k)s in 2024 ($8,000 and $30,500, respectively, for adults 50+). There’s no employer match, and you have to pay taxes on your contributions when you make them.
But Roth IRAs also offer some key advantages that 401(k)s and most other retirement accounts don’t. Here are three reasons you might be really glad you stashed some money in a Roth IRA this year.
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1. Tax-free withdrawals in retirement
The biggest advantage to Roth IRAs is the tax-free withdrawals they allow in retirement. Once you turn 59 1/2 and have had your Roth IRA for at least five years, you can withdraw all your cash without giving a cent of it back to the government.
This makes tax planning in retirement a lot easier because you know that all the money you have in your Roth IRA is yours. However, that doesn’t mean it’s the right choice for everyone.
You pay taxes on your contributions in the year you make them, and that could be more costly if you’re in your peak earning years. It’s also worth noting that some high earners aren’t even eligible to contribute to a Roth IRA directly. Roth IRAs are typically best suited for those who expect to be in the same or a higher tax bracket in retirement than they are in today.
2. Penalty-free withdrawal of contributions under 59 1/2
Most retirement accounts do not permit you to withdraw funds under 59 1/2, unless you qualify for certain exceptions. If you take money out early without meeting an exception, you’ll pay a 10% penalty. Roth IRAs follow this rule as well for earnings, but not for contributions.
You can withdraw the money you personally put in tax- and penalty-free at any age. This makes it a great option for those who plan to retire early and don’t want to risk penalties for accessing their savings under 59 1/2.
Roth IRA withdrawals follow a pattern — contributions first, then any converted funds, then earnings. But if you hope to avoid penalties, you need to be aware of how much you’ve personally contributed over the lifetime of your Roth IRA. Your account provider can help you figure this out if you’re not sure.
3. More flexibility to invest how you want
Roth IRAs enable you to invest in virtually anything, unlike 401(k)s, which typically limit you to a handful of funds your employer selects. This flexibility can help you maximize your gains while reducing how much you spend on fees.
If you’re not sure what to invest in, S&P 500 index funds are a great place to start. They diversify your savings between 500 U.S. companies, and some of the best ones only charge you about $3 for every $1,000 you have invested in the fund each year.
There’s still plenty of time to set aside money in your Roth IRA if you think it’s a good fit to you. But if not, don’t worry. There are always 401(k)s and traditional IRAs. You may be able to stash some cash in a health savings account (HSA) as well.
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