Roth Accounts: Small Contributions, Big Results
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Roth Accounts: Small Contributions, Big Results
Roth contributions are a powerful tool for building savings for retirement. For 2025, the amount you can contribute to a Roth IRA is $7,000, or $8,000 if you’re over age 50. Those might not seem like huge amounts, but over time, they can grow into significant TAX FREE pools of assets. The earlier you can get started, the better.
So, What Exactly Are Roth Contributions?
Roth contributions go into a retirement account, like a Roth 401(k) or Roth IRA, after you've paid taxes on the money. That means you don’t generally get a tax break today, but your contributions grow tax-free, and when you take them out in retirement, they’re completely tax-free too (as long as you meet a few rules).
Why make Roth contributions? Here are the Benefits:
1. Tax-Free Growth and Withdrawals
With Roth accounts, all the growth is yours to keep.
2. More Flexibility in Retirement
Since Roth withdrawals don’t count as taxable income, they can help you stay in a lower tax bracket in retirement. That gives you more control over how much tax you pay and can even reduce how much you owe on things like Social Security benefits or Medicare premiums.
3. You Know What Your Taxes are Now
Predicting future tax rates is like predicting the weather in the future. With Roth contributions, you're locking in today’s tax rates, which are historically low. If tax rates rise in the future, you may save by making after-tax Roth contributions versus making pre-tax contributions, which are taxed later.
4. No Required Minimum Distributions (RMDs) for Roth IRAs
While traditional IRAs force you to start withdrawing money (and paying taxes) by a certain age, Roth IRAs let your money keep growing untouched for as long as you want. That’s great for people who don’t need the funds right away, or if you want a great account type to pass to your heirs as they won’t have to pay taxes on the funds either.
5. Great for Younger Savers
If you’re early in your career and in a lower tax bracket, Roth contributions are especially valuable. You’re paying relatively little in taxes now and potentially avoiding higher taxes later when you’re in a higher tax bracket.
6. You Can Withdraw your Roth IRA Contributions at Any Time
If you’ve made contributions to a Roth IRA and you decide you need some of those funds, any amount you’ve contributed can be withdrawn at any time, with no penalty and no tax. This gives Roth IRAs flexibility that traditional IRAs and pre-tax retirement plans just don’t have.
A Quick Example
Let’s say you make the following contributions to a Roth IRA earning 8% a year:
· $2,000 a year from Age 25-30
· $3,000 a year from Age 30-39
· $4,000 a year from Age 40-49
· $5,000 a year from Age 50-59
· $6,000 a year from Age 60-65
After making all those small contributions, by age 65 you would’ve contributed $166,000, but your account would be worth over $900,000!
Diversify Your Account Types
You don’t have to choose between traditional and Roth. You may be able to do both! As long as you meet the income requirements, you can contribute to a Roth IRA and a pre-tax retirement plan (like a 401k). And if your income is too high, you may be able to utilize a backdoor Roth strategy that converts post-tax dollars into Roth dollars. Either way, getting money into a Roth IRA protects it from future taxes, and that can be a smart way to diversify your tax situation in retirement.
Don’t Forget to Invest!
After making your contributions, you’ll need to invest them! Consult with your Gilbert and Cook team for help with your investment allocation.
Bottom line: Roth contributions might not give you a tax break today, but they offer tax-free money tomorrow. And when you’re living your best retired life, you’ll be glad you made the choice to save a little now for a lot more later.
Ready to start? Whether it's a Roth IRA or a Roth 401(k), it’s worth exploring how this strategy fits into your financial plan. Consult with your Gilbert and Cook team for help with choices around Roth contributions.