Americans don't exactly have the best track record for saving money. Unfortunately, many Americans are missing out on an important way to save for retirement by not taking advantage of Roth individual retirement accounts (IRAs).
According to research by the Investment Company Institute, just 24.6% of U.S. households -- or 32.3 million -- contributed to a Roth IRA in 2022.
That leaves more than 75% of American households missing out on Roth IRA contributions. If you're one of them, here are a few reasons why Roth IRAs are a great way to save for retirement and how to increase your Roth IRA contributions.
Why Roth IRAs are a great investment choice
For those who do have a Roth IRA, 59.1% make regular contributions, according to Fidelity. Here are a few key reasons why you might want a Roth IRA:
- Your money grows tax free: Roth IRAs are a form of tax-advantaged account that you contribute money to for retirement. Once the money goes into a Roth IRA, it grows tax free, meaning you don't have to pay taxes on the funds you withdraw in retirement. This is in contrast to a traditional IRA, in which you deduct the IRA contributions from your taxable income when you make a contribution but have to pay taxes when you make withdrawals in retirement.
- You can withdraw contributions without penalty: Let's assume you contributed $10,000 to your Roth IRA over the past four years. If you want those contributions out of the account for any reason, you could take the full $10,000 out without any penalty. This flexibility is a big perk for many people who want to save for retirement but still want easy access to their money.
- You can let the money grow as long as you like: Another huge benefit of Roth IRAs is that you don't have to take what's called required minimum distributions (RMDs). This means you can let your money grow in the Roth IRA well into your retirement years, unlike a traditional IRA, which requires you to take RMDs after you turn 72.
How to increase your Roth IRA contributions
While having any investment account is a good step toward retirement savings, people with a Roth IRA are more likely to contribute to their accounts than those with a traditional IRA.
If you already have a Roth IRA or you're planning to open one through a brokerage firm, there are a few simple steps you can take to maximize your contributions, including:
- Automate it: Setting up automatic contributions from your checking account is one of the easiest ways to boost your Roth IRA contributions. Putting your retirement savings on autopilot ensures you won't spend that money on something else.
- Increase the amount gradually: When you get a raise at work, allocating the extra money (or at least some of it) to your Roth IRA is a good idea. Many experts recommend putting 15% of your income toward retirement. So, when your income goes up, so should your Roth IRA contributions.
- Make catch-up contributions: If you're 50 or older, you can make additional annual contributions to your Roth IRA above the annual limit. For example, in 2024, the contribution limit for Roth IRAs is $7,000. But if you're 50 or older, you can add an additional $1,000 for a maximum of $8,000.
How to set up a Roth IRA
The first thing you need to do to set up a Roth IRA is to determine if you're eligible. In general, if you're single and earning income and that income is less than $146,000 in 2024, you can contribute the maximum amount to a Roth IRA. If you're married and filing jointly, your combined income needs to be less than $230,000 in 2024. You can also find more detailed information about earning limits and eligibility on the IRS website.
You can open a Roth IRA through a brokerage firm or through a bank. You'll need some personal information like your Social Security number, employer information (if applicable), and personal identification.
Roth IRAs are an excellent way to save for retirement, and it's a shame many people are missing out on their benefits. A few minutes spent opening an account and automating contributions could go a long way toward building a more secure retirement.
