Shockingly few people use this fantastic wealth-building tool for their benefit.
A lot of information about retirement planning is aimed at people in their prime working years. But, as the data shows, a large group of people who are either retired or will soon retire may not have the nest egg they dreamed of.
According to research by The Motley Fool, the average person between ages 55 and 70 has saved between $185,000 and $200,000 for retirement.
If you’re at the end of your prime working years but want to continue building wealth in retirement, check this out. You can likely utilize a Roth IRA to get your financial goals across the finish line.
Here are five tips you need to know.
1. Roth IRAs can be great for retirees
A Roth IRA is a type of individual retirement plan. What makes a Roth different than a traditional IRA is that your contributions are not tax-deductible, but you won’t be taxed on your withdrawals. In other words, your money grows tax-free.
It’s such a sweet deal for individuals that the government puts income limits on who can use it and caps how much people can put in each year. As a retiree, there’s a good chance your income will be under 2024’s modified adjusted gross income threshold. Single filers and heads of households face restrictions beyond $146,000, while joint filers can make up to $230,000 before limits kick in.
Additionally, Roth IRAs have some rules that benefit older savers. For example, you can contribute an extra $1,000 annually if you’re 50 or older, which brings your 2024 contribution limit to $8,000.
2. You can withdraw Roth IRA money on your schedule
One of the best parts of Roth IRAs is how flexible the withdrawal rules are. For instance, a traditional IRA and 401(k) will make you start withdrawing funds between ages 72 and 73. There are no such deadlines for a Roth IRA. That allows you to give as much time for your portfolio to compound and grow (again, tax-free) as you want.
In the meantime, you can take social security and draw from your other savings and retirement accounts.
3. Educate yourself and take action
Getting the most out of a Roth IRA does require some initiative. The annual contribution limits mean that each tax year is a window that’s closed forever once it passes. Waiting years to contribute to a Roth IRA is thousands of dollars in contributions and investment returns that you can’t make up down the road.
According to data from the Investment Company Institute, only 15% of U.S. households contributed to their Roth or traditional IRAs in 2021. The research indicated that confusion about contribution rules may hurt participation, so make sure you understand the ins and outs of Roth IRAs to stay on top of your financial game.
4. Just because you can take money out doesn’t mean you should
I’ve said it once already: Roth IRAs are remarkably flexible. Did you know you can withdraw your Roth IRA contributions (not earnings) anytime, starting five years from your first contribution? That can sound appealing, especially if a significant expense, like a home purchase, comes up.
Remember that money taken out is no longer growing and compounding for you. Always think about the long-term implications of any money move you make, and it’s often best to leave your Roth IRA alone because you can only contribute so much at a time. That $5,000 you took could have been $25,000 years from now.
5. The backdoor Roth IRA could be an option in some cases
There is a little trick to amass a large Roth IRA quickly. You can convert a tax-deferred account like a traditional IRA or 401(k) to a Roth IRA. This method is called a backdoor Roth IRA because there aren’t limits on conversions like on contributions.
Converting a tax-deferred account to a Roth IRA will likely create a hefty tax bill because the conversion is taxable. So, if you’re interested in a backdoor Roth IRA, ensure you understand all the rules. Don’t hesitate to consult a professional accountant to give you an exact picture of what to expect.
