You’re young, and money can be confusing. You know you need to be saving for retirement, but where do you begin? There are some mistakes you can’t afford to make when planning for your retirement, and one of the biggest is missing out on using a Roth IRA.
A Roth IRA is a specific type of individual retirement account that gets taxed now but grows tax-free for you to use in retirement. That’s a huge advantage early in your career when you’re in a lower tax bracket.
As you earn more and move up tax brackets, your ability to contribute to a Roth IRA could be limited. You can put away up to $5,500 a year if you earn less than $118,000 as a single tax filer or $186,000 if you’re married and file jointly.
Once you pass the income limit, the amount you’re allowed to contribute will decrease toward zero. Once you earn $133,000 if filing single and $196,000* if married and filing jointly, you’ll no longer be able to contribute to a Roth IRA. But you will be able to contribute to a traditional IRA, which is the same as a Roth except you’re taxed when you withdraw the money instead of when you deposit it.
If you start at age 25 and steadily contribute the maximum of $5,500 each year, you could earn a $1 million or even more by age 65 thanks to the power of compound interest, which is interest on your interest.
A Roth IRA is one step toward securing your financial future you can’t afford to skip.
*These numbers change from year to year.