When it comes to planning for retirement, few vehicles can pay off as much as a Roth IRA. These retirement accounts have been available to Americans for more than 20 years. All that it takes to get a Roth IRA started is earned income, but the payoff in the future can be impressive.
Save The Max
Making a commitment to save the maximum every year is a great way to build up a sizable nest egg with a Roth IRA. As of 2021, future retirees can save up to $6,000 per year. Those who have reached 50 years of age can make catch-up contributions. These are an additional $1,000 per year, which makes a total of $7,000 for older workers.
Invest In Stocks
While it might seem that stocks are volatile, it’s important to make investments in that area of the economy. Investing in low-quality companies that may or may not make it for the long run is a bad idea, but investing in high-quality companies that have been around and turned profits for decades can be a great way to build wealth. Total market and S&P 500 index funds can be great options for building up equity in a wide range of companies at a low cost. Opening up a Roth IRA with a low-cost online brokerage can enhance the cost savings and put more money to work each year.
The best reason for investing in a Roth IRA is the tax benefit it provides. While investors have to pay taxes on the contributions in the current year, they will never be taxed again as long as the money remains in the account until age 59 1/2. Investors can withdraw their contributions before this age without penalty, but all investment gains need to be left alone to avoid any penalties for early withdrawal.
Those who decide to invest in a Roth IRA at an early age can take advantage of decades of tax-free compounding. Withdrawals that meet the age requirements will avoid taxes. Additionally, there are no required minimum distributions with a Roth IRA. An employee who maxes out a Roth IRA at current levels from age 25 to age 65 could expect a tax-free nest egg of more than $3 million, assuming a 10% rate of return. Few investments will pay off as well.