Are you missing out on a tax-free retirement?
We are all familiar with employers plans like the 401(k) or 403(b), IRAs, etc.
Contribute money now tax free and bring home a slightly larger paycheck. That's great for today - we know what the tax rules are for today.
But do you know what tax rates or your tax scenario will be in retirement???
Opening a Roth IRA can be a powerful financial move for several reasons, particularly if you’re aiming for a tax-free retirement. There are, of course, some limitations to contributing if you are a high earner, but we will dive into that in the next email.
Here's why everyone should consider starting one now:
Benefits of a Roth IRA
Tax-Free Growth and Withdrawals
Contributions to a Roth IRA are made with after-tax dollars. This means your money grows tax-free and qualified withdrawals in retirement (age 59½ or older) are completely tax-free.No Required Minimum Distributions (RMDs)
Unlike traditional IRAs, Roth IRAs do not require you to take distributions at a certain age, allowing your money to grow tax-free for as long as you live.Flexibility with Contributions
You can withdraw your contributions (not earnings) at any time, penalty- and tax-free, providing liquidity in case of emergencies.Diversification in Tax Planning
A Roth IRA provides a hedge against future tax increases. By paying taxes upfront, you lock in your current tax rate and avoid higher taxes in retirement.Compound Growth
The earlier you open a Roth IRA, the more time your investments have to grow through compounding.
The Five-Year Rule
The five-year rule applies to withdrawals of earnings (not contributions) from a Roth IRA. Here's how it works:
To withdraw earnings tax-free, the Roth IRA must have been open for at least five years and you must meet other criteria, like being age 59½ or using the withdrawal for a qualified purpose (e.g., buying a first home).
The five-year clock starts on January 1 of the year you make your first contribution, even if you contribute on the last day of the tax-filing deadline.
For example, if you open a Roth IRA in April 2025 for the 2024 tax year, your five-year clock begins on January 1, 2024. This means you could withdraw earnings tax-free starting January 1, 2029, assuming you meet the other requirements.
Why Open One Now?
Start the Five-Year Clock Early
Opening a Roth IRA as soon as possible allows the five-year rule to begin, giving you more flexibility later.Capitalize on Time
The sooner you contribute, the longer your investments have to grow tax-free.Maximize Contribution Limits
Roth IRA contributions are limited each year ($6,500 for 2024; $7,500 if you’re 50+ and $7,000 and $8,000 in 2025). Opening one now ensures you don’t miss out on this year’s contribution window.Uncertainty About Future Tax Laws
Tax laws may change, and Roth IRAs provide certainty by locking in your current tax rate. Future income or legislation may disqualify you from contributing directly to a Roth IRA.Build Retirement Security
A Roth IRA complements other retirement savings (like a 401(k)) by adding a source of tax-free income, reducing your tax burden in retirement.
Final Thoughts
Opening a Roth IRA now is a smart financial move for anyone eligible. By starting early, you maximize compounding benefits, lock in current tax rates, and start the five-year clock. Even small contributions can make a significant difference over time.
If you're unsure where to begin, call me and we will discuss!