It's always exciting when you're anticipating a salary increase, whether by a raise or a new job opportunity. However, one potential challenge that could come from it is becoming ineligible to contribute to a Roth IRA.
Roth IRAs are retirement accounts that allow you to contribute after-tax money and then take tax-free withdrawals in retirement. The latter is what makes them appealing. Growing your investments for years without taxes waiting for you in retirement can save you thousands.
Unfortunately, the IRS limits who can contribute to a Roth IRA by income. For 2024, the most you can make and contribute to a Roth IRA is $161,000 if you're single and $240,000 if you're married and filing jointly. If you anticipate crossing those thresholds in 2024 (or in the foreseeable future), you could benefit from using a Roth IRA before it's too late.
A relatively low investment today could be worth a lot later
A good thing about Roth IRAs is that your investments in the account continue to grow and compound regardless of your eligibility to continue contributing to them.
As an example of how powerful that can be, let's imagine someone's Roth IRA is at $50,000 when they become ineligible to contribute. Without contributing another penny, the account could grow to over $336,000, averaging 10% annual returns over 20 years.
Depending on how much they contributed to get the IRA to $50,000, that could easily be close to $300,000 in capital gains. For single filers making over $47,025 or married couples filing jointly making over $94,050, the capital gains tax on $300,000 is anywhere from $45,000 to $60,000, given the 15% and 20% capital gains tax rates. In a Roth IRA, you get to keep all of that money.
Even making a one-time contribution of $6,500 (the 2023 tax year maximum allowed) could grow and compound to a nice amount by the time you hit retirement. Averaging 10% annual returns over 20 years would bring its value to over $43,700.
A retirement account that's made for flexibility
The Roth IRA's best benefit is the tax-free withdrawals it allows in retirement, but aside from that, it's also an excellent retirement account in general. Unlike a 401(k), where investment options are provided, a Roth IRA allows you to choose your own investments. This greatly benefits people who want to tailor their investments to match their risk tolerance, retirement goals, and time horizon.
For example, an Amazon employee who wanted to buy Apple shares in their 401(k) probably couldn't do so unless it was through a mutual or index fund. In a Roth IRA account, they could buy Apple shares just as easily as they would any stock through their regular brokerage account. The same goes for industry-specific exchange-traded funds (ETFs) and other investments likely not offered by a 401(k) plan provider.