Retirement accounts are all similar in that they give you a tax-advantaged way to save money for your future. But each has its own set of rules and benefits, and few offer as many perks as the Roth IRA. Here are a few reasons you may want to consider putting some of your savings in one of these accounts in 2023.
1. You want an extra place to stash retirement savings
Roth IRAs enable you to save up to $6,500 in 2023 if you're under 50 or $7,500 if you're 50 or older. These limits aren't as high as 401(k) limits, but they are up slightly from 2022. Roth IRAs make great homes for your savings if you don't have access to a workplace retirement plan or if you don't like the investments or fees your current workplace plan has.
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High earners will need to be mindful of the Roth IRA income limits to avoid penalties. Some may still be eligible to contribute some money directly to a Roth IRA, though their annual contribution limit may be lower than the figures above. Others may not be able to contribute any money to a Roth IRA directly. But they can still do a backdoor Roth IRA where they put money in a traditional IRA first and then do a Roth IRA conversion in the same year.
2. You want tax-free withdrawals in retirement
Roth retirement accounts don't give you any sort of upfront tax break like traditional IRAs or 401(k)s. But in exchange for paying taxes on your contributions when you make them, you get tax-free withdrawals in retirement. This can reduce how much income tax you owe the government once you retire. But there are a few things you need to be aware of.
First, you can technically withdraw your earnings tax-free at any time since you've already paid taxes on those. But you should avoid this whenever possible as it will slow the growth of your savings over time.
Second, you could owe taxes on your earnings if you withdraw them before you've had your Roth IRA for at least five years. The countdown for this begins on Jan. 1 of the year you opened your first Roth IRA. So if you open one at any point in 2023, the five-year clock begins on Jan. 1, 2023 and ends on Jan. 1, 2028. If you do any Roth IRA conversions, these will each have their own five-year countdown before you can withdraw them tax-free.
Even if you've had your account for longer than five years, you could still face a 10% early withdrawal penalty if you take earnings out of your Roth IRA before you're 59 1/2. If you plan to withdraw money sooner, stick to only as much as you've personally contributed to the Roth IRA, or keep some savings in a taxable brokerage account where you can access it at any time.
3. You want to make withdrawals on your own schedule
Nearly all retirement accounts have required minimum distributions (RMDs). These are mandatory annual withdrawals that all seniors need to take from their accounts beginning in the year they turn 72. But Roth IRAs are a notable exception.
You can leave your money in your Roth IRA as long as you'd like since you've already paid your share of taxes on its funds. This makes it a great place to keep any money you plan to pass along to your heirs after your death.
Roth IRAs aren't a great fit for everyone, but if any of the above benefits piqued your interest, you may want to consider stashing some money here in 2023. If you max it out, you can always switch to a different retirement plan for the remainder of the year.
