If there’s one retirement account you can maximize in 2024, it’s this one.
There’s no denying that retirement accounts are one of the most effective ways to save and invest for retirement. They offer unique benefits, provide tax breaks, and impose restrictions and penalties to keep people from entering the accounts before retirement.
In an ideal world, everyone would be able to make the most of all of their available retirement accounts. Unfortunately, given the contribution limits for various retirement accounts, this is not feasible for most people. That said, if there’s one retirement account to prioritize for maxing out in 2024, it’s a Roth IRA.
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Roth IRAs have unique tax advantages.
Roth IRAs offer unique tax breaks compared to 401(k)s or traditional IRAs. With a Roth IRA, you have the opportunity to contribute and invest after-tax money and make tax-free withdrawals in retirement. To qualify for tax-free withdrawals, you must be age 59 1/2 or older and made your first Roth IRA contribution at least five years ago.
Tax breaks for a 401(k) or traditional IRA are at the forefront, along with the opportunity to lower your taxable income. However, the ability to make tax-free withdrawals through a Roth IRA may be more advantageous for retirees.
Generally, capital gains earned on investments are subject to capital gains tax when sold for a profit. For most people, this means a 15% or 20% tax ($1,500 or $2,000 per $10,000 of capital gains). For those who invest consistently throughout their careers, a Roth IRA can easily save thousands of dollars in taxes in retirement.
The 2024 capital gains tax reductions are as follows:
| submission status | 0% tax rate | 15% tax rate | 20% tax rate |
|---|---|---|---|
Married, filing separately |
Source: National Tax Service.
You can still reap rewards if you max out your Roth IRA in one year.
Compared to a 401(k), an IRA has relatively low contribution limits. The maximum you can contribute to an IRA in 2024 is $7,000 ($8,000 if you are 50 or older) for both Roth and Traditional. Although it’s a relatively small amount, even a $7,000 investment can pay off big over time thanks to compound interest.
A one-time $7,000 investment that earns an average annual return of 10% over 10 years would grow to just over $18,000, representing a capital gain of about $11,000. Instead of paying $1,650 (15%) or $2,200 (20%) in taxes, all of your earnings will be yours in the Roth IRA.
It’s easy to underestimate how far a relatively low investment can go, but time is a powerful force in investing, especially if you’re consistent. If you invested $7,000 each year for 10 years and earned an average return of 10%, you would have a capital gain of almost $41,500. This would save you $6,225 or $8,300 in taxes.
Benefits beyond tax relief
Tax cuts aside, Roth IRAs are great because of their flexibility. First of all, it operates similar to a standard brokerage account because you can invest in just about any stock or exchange-traded fund (ETF) you want. The Next Big Thing Whether it’s growth stocks or ETFs specific to the industry you’re interested in, you can invest in them. This is different from a 401(k), which offers investment options.
Roth IRAs also offer more lenient withdrawal rules. You can withdraw your contributions (but not your earnings) from your Roth IRA at any time without the usual 10% early withdrawal fee. The goal is to have money left in your retirement account until you retire. But sometimes life can be very changeable. Having flexibility in accessing your funds can provide a lifeline.
You can also take penalty-free early withdrawals from your Roth IRA for a variety of life events. For example, first-time homebuyers can withdraw up to $10,000 to buy a home. Withdrawals are available for qualified education expenses, such as tuition. You can use these funds to pay your health insurance premiums even if you are unemployed. 401(k)s do not offer this feature.
Take advantage of it while you can
The main disadvantage of a Roth IRA is the income limit ($161,000 if single, $240,000 if married and filing jointly). If you’re below the limit, it’s often worth utilizing a Roth IRA because of the long-term tax benefits. You may not always be eligible, and you may be eligible for compensation now or later.
For those with a 401(k), it’s a good idea to contribute enough to take advantage of the employer match and then focus on maximizing your Roth IRA. It can be the best of both worlds.
