If you are tired of paying taxes on every dollar you earn, you need to explore the benefits of a Roth IRA (individual retirement account). It is a tax-free gift on earnings that comes with integrated benefits that you can enjoy now and later. You just need to make sure that you have received an income and that it is below the income limits that prevent some from making contributions to Roth.
You will not have any tax breaks on the money you use to finance the Roth IRA, but all of your earnings increase without tax. After reaching the age of 59 and a half and following the five-year rule, every penny in your Roth IRA is yours to keep – no need to split your earnings with the IRS. If you’ve ever dreamed of building a six- or seven-digit retirement fund, the Roth IRA makes that dream possible without the uncertainties of paying taxes later. But it all starts with a simple step – maximizing your annual contributions.
Image source: Getty Images.
The power of Roth IRA contributions
While there are a variety of savings options available – and you probably had access to your employer’s retirement accounts – there is a reason why the Roth IRA reigns supreme over other accounts: you can choose your investments and withdraw everything you put into anytime.
Many people automatically assume that if you tamper with your Roth IRA money before retirement, you will be penalized and will have to pay taxes. This is not the case. This rule applies only to earnings in your account that were withdrawn prematurely. If you contribute $ 3,000, you can always withdraw $ 3,000 without worrying about any term or tax restrictions.
For 2021, you can contribute up to $ 6,000 to a Roth IRA if you are under 50 and have an income. But if you are 50 or older, you will receive a special $ 1,000 upgrade contribution that allows you to contribute a maximum of $ 7,000 to a Roth IRA. You are not required to contribute any specific amount each year. You simply cannot contribute more than the maximum allowed.
Maximize your tax-free earnings
The ability to withdraw contributions is an attractive feature of the Roth IRA, but maximizing your contributions brings even greater rewards. You will be able to invest in high quality assets that will give you a better chance of earning more tax-free income in your account. This is the secret to profit from all the benefits that Roth IRA has to offer.
Imagine if you had contributed $ 6,000 to your Roth IRA in 2020 and immediately bought shares in Tesla (NASDAQ: TSLA). To say that your account would have more than doubled would be an understatement. Your Roth IRA balance would have grown by more than 720% by the end of the year, allowing you to easily transform $ 6,000 to almost $ 50,000. That represents $ 44,000 in tax-free profits that you can take advantage of later!
Start as early as possible
It is tempting to leave retirement planning for a later date, but think about it: the sooner you start, the more tax-free income you can accumulate.
You must treat the Roth IRA as a limited time offer account that may not last forever. Simply put, receiving a huge increase in your salary may disqualify you from making direct contributions to a Roth IRA, because your income exceeds the limits.
That’s why you should start maximizing your account right now, if you qualify. Don’t stop there – open an account for your kids too! You don’t have to be a certain age to take advantage of a Roth IRA. Even a three-year-old can have a Roth IRA account, but there is a caveat: anyone who contributes to a Roth IRA must have received the year’s income. If you made less than the maximum contribution ($ 6,000 for 2021), your contribution is limited to the amount of your earned income. Therefore, if your child earned $ 2,000 in modeling and acting activities, you could contribute up to $ 2,000 to a Roth IRA on your child’s behalf. Opening a Roth IRA for a young child is one of the simplest ways to help your child become a millionaire before retirement.
Don’t leave money on the table
The Roth IRA’s tax-free earnings feature is big business. Taxes are the biggest individual expense for most people. The less money you have to pay in taxes, the more money you can keep to achieve your wealth-building goals.
Start planning now. If you want to contribute the maximum amount this year, all you have to do is save $ 500 a month for 12 months. Then invest in assets that will allow you to create an extra stream of tax-free income that you can enjoy during retirement!