Most people understand that saving for retirement is important. But given all the different demands on your finances, it's hard to set money aside that you won't need for years or even decades. It's even harder to give up the upfront tax benefits that are available for retirement savers in favor of getting a much bigger payoff down the road.
Nevertheless, being as efficient as you can with your retirement savings is important. That's why contributing to a Roth IRA can be the best move you can make. With just 15 days left until the April 15 deadline for 2018 tax year contributions to a Roth, you can't afford to waste time before moving forward with putting money into this highly beneficial retirement account.
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Why a Roth might be right for you
Many people have other retirement accounts that give them immediate tax breaks. For instance, a traditional IRA typically gives you a tax deduction in the year in which you make contributions, while a 401(k) plan at work can allow you to set money aside on a pre-tax basis and not have to pay taxes until you take withdrawals after you retire.
A Roth doesn't offer these immediate benefits, but it gives you that's potentially even more valuable: completely tax-free treatment of investment income and gains while your assets are inside the Roth. Even when you take withdrawals, you won't generally have to pay any taxes on the withdrawn amount.
That's particularly nice for those who would otherwise face high tax bills in retirement. Those who have only regular retirement accounts often find that they pay far more tax than they expected on the money they withdraw to cover living expenses. A Roth can help you moderate your tax bill while still giving you the financial support you need to have the retirement lifestyle you've dreamed about throughout your career.
Who's allowed to contribute to a Roth IRA?
Only taxpayers who meet certain guidelines are allowed to contribute to a Roth IRA in any given year. First, you can only contribute as much as you earn from a job, self-employment, or other business income. That means that if your only income is from investments, Social Security, or other sources other than work-related earnings, then you won't be able to contribute to a Roth.
In addition, there are income limits for Roth contributions, such that if you make too much money, you won't be allowed to contribute in that give year. For 2018, the Roth income limits are as follows:
Those whose incomes are less than the number in the left column are allowed to contribute up to $5,500 for the 2018 tax year if they're younger than 50 years old. Those 50 or older can add another $1,000, making the total $6,500. Both of those numbers go up by $500 for the 2019 tax year to $6,000 and $7,000 respectively.
If your income is above the number in the right column, then you can contribute to a Roth at all. Those with incomes in between the two numbers have to reduce the appropriate maximum contribution by a percentage equal to how far in the range they are above the lower bound. For instance, if you're single with income of $129,000, then you're $9,000 above the $120,000 lower end of the range. The width of the range is $15,000, so you're $9,000 divided by $15,000 or 60% of the way up the range. That means you have to reduce the contribution limit by 60% based on your income.
What if my income's too high to contribute to a Roth?
Even if you can't make direct contributions to a Roth IRA, there are other ways to get money into these tax-favored accounts. If you have other retirement assets, such as traditional IRAs or a workplace-sponsored 401(k) retirement plan, then you might be able to use a Roth conversion to funnel money into a Roth IRA.
If you do a Roth conversion, then you generally have to include the amount of money you convert as taxable income in the year you do the conversion. However, that's usually the last time you'll have to pay tax, because the converted money inside the Roth is treated the same way that any contribution would get treated. The tax-free benefits of a Roth IRA can be worth boosting your tax bill through a conversion now -- although it's important to run the numbers to understand the full impact of your conversion decision.
How long do I have to open a Roth?
You can open a 2018 Roth IRA at any time until the regular tax filing deadline for your 2018 tax return, which is April 15. You can also make a 2019 tax year contribution to a Roth IRA right now, although you'd have until April 2020 to do so if you can't do it immediately.
Nobody likes to pay more in taxes than they have to. By using Roth IRAs, you can get tax benefits that will cut your long-run tax bills substantially. That's a gift to yourself that keeps on giving -- but don't run out of time to get started with a Roth.
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