If maxing out your Roth IRA is not one of your goals for 2024, you might want to consider it. A Roth IRA is highly praised because it's a tax-advantaged account that allows you to contribute after-tax dollars now, while you are in a lower tax bracket, in exchange for tax-free income during retirement. As long as you have earned income and your income doesn't exceed the threshold, you can stash away money in a Roth IRA.
The Roth IRA is loaded with benefits you can use both now and during retirement, but you need to contribute to the account to take advantage. If you're wondering whether to step up your retirement game this year and max out your Roth IRA, here are a couple of reasons why you should take the plunge and one reason to hold off.
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1. You might not qualify next year
If you are upskilling and seeking an exponential increase in your income, you might not be eligible to make direct contributions to a Roth IRA forever. For 2024, you can contribute up to $7,000 to an individual retirement account (IRA) if you're under 50 and up to $8,000 if you're older and meet the income requirements.
Let's say you file taxes as a single person. Your modified adjusted gross income (MAGI) must be under $161,000 for tax year 2024 to contribute to a Roth IRA. If your MAGI is less than $146,000, you can contribute the full $7,000. If your MAGI is between $146,000 and $161,000, you can contribute a reduced amount. Although the income thresholds will most likely increase in 2025, you could potentially exceed those limits if your work situation changes.
Here are the income thresholds you need to pay attention to in 2024 to ensure you qualify to max out your Roth IRA. When 2025 rolls around, you'll need to review the updated limits to make sure you still qualify.
|
2024 TAX-FILING STATUS |
INCOME LIMIT FOR A FULL ROTH IRA CONTRIBUTION |
ROTH CONTRIBUTION PHASES OUT ENTIRELY FOR INCOME ABOVE |
|---|---|---|
|
Single and head of household |
$146,000 |
$161,000 |
|
Married filing jointly |
$230,000 |
$240,000 |
Data source: IRS.
2. Get closer to a million-dollar retirement
The number of Fidelity retirement plans with a balance of $1 million or more has reached an all-time high. You might have a shot at joining the million-dollar retirement club if you max out your Roth IRA this year and keep it up in the future.
Here's an example of how your money can grow over time if you max out your Roth IRA in 2024 and continue to contribute $7,000 annually. Although investment returns aren't guaranteed, we'll assume an 8% return, which isn't far off from historical averages. Keep in mind that Roth IRA contribution limits tend to rise over time, so you could potentially reach your goal sooner if you continue to max out your Roth IRA.
|
Number of Years |
$7,000 Invested Annually |
|---|---|
|
10 |
$109,518 |
|
20 |
$345,960 |
|
30 |
$856,421 |
|
40 |
$1,958,467 |
Data source: Author.
You might want to hold off in this situation
While the benefits of maxing out a Roth IRA are compelling, it might not be the best move for you this year if you haven't hit certain financial milestones yet. For example, if you're still trying to build up your emergency fund, you might want to focus on that first. Aim to set aside at least three to six months worth of living expenses, or more if your income is unpredictable, into an account that you can't easily dip into.
Also, if you have high-interest debt, such as credit card balances, you'd probably be better off paying off these debts first. While you could possibly earn somewhere around 10% in the stock market, which is the historical average return over the last five decades, this pales in comparison to the average credit card interest rate of 22.8% in 2023. According to the Consumer Financial Protection Bureau, these rates have been gradually increasing over the last decade and have now reached an all-time high.
If you qualify to contribute to a Roth IRA this year, assess your finances first to see if you can spare the extra money. If not, you can position yourself to do it next year. Keep in mind that once your income exceeds the threshold, you'll need to find alternative ways to contribute to a Roth IRA.
No matter where you stand right now, thinking about your future self, setting goals, and creating an action plan is a surefire way to increase your chances of a comfortable retirement.
