11 Best Roth IRA Accounts for December 2023

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What misconceptions might millennials or Gen Z have about Roth IRAs and planning for retirement?

Many millennials or Gen Z think they cannot contribute to Roth IRA (or IRA) until they start a formal job — for instance, after graduating from college or graduate school. This is not the case; as long as an individual has earned income, he/she can contribute to an IRA up to the $6,500 annual contribution limit (for 2023) or 100% of his/her earned income, whichever is less.

Roth IRA has income limits. For single taxpayers, if his/her income exceeds $138,000, the contribution starts to phase out. When his/her income reaches $153,000, the taxpayer is not allowed to make any Roth contributions. As younger workers advance their careers, they are likely to be capped out. They are also more likely to be subject to the income limit if they live in high cost of living cities. In addition, as younger workers get married, their Roth contribution is subject to the “marriage penalty” — the income limit for married filing jointly is $218,000 (fully phased out at $228,000), which are not doubles of the single amounts ($138,000 and $153,000).

Another misconception is that self-employed (SE) workers cannot contribute to Roth, but your website has another article that covered this recently. As such, I did not talk about the income from SE workers. A point to note is IRS’s definition about “self-employed” is a lot wider than many in younger generations realize. In many cases, their side business income can qualify as SE income, hence is allowed for Roth IRA contributions.

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How can I determine if a Roth IRA makes sense for me?

Assuming investors have enough funds to save for retirement, they should consider all options available to them — most likely Roth IRA and employer plans such as 401(k) accounts. However, be mindful that from a tax perspective, they are different. They are also very different from account administration and plan design perspectives. For tax, Roth IRAs are “after tax” in that taxpayers do not receive deductions for the contributions made. 401(k) contributions are “pre-tax” in that the contributions are tax-deductible. In addition, many employer plans provide matching for 401(k) contributions, and a recent Congressional proposal, if it passes, will allow employer plans to match participants’ student loan payments, similar to those of retirement plans.

Many researchers think that, given the current level of the U.S. deficit, it is highly likely that future tax rates will increase to finance government expenditures and debt payments. If one believes this to be the case, prepaying taxes under Roth IRA will be an attractive option.

One more note is that although many have touted that there are no penalties or taxes to withdraw one’s Roth contributions as a benefit, there may be tax consequences for withdrawing the earnings/capital gains before the retirement age. The IRS provides several exceptions; however, it is still not ideal to view Roth IRA as an emergency savings account.

What is the biggest advantage to using a Roth IRA?

The biggest advantage of Roth IRAs is that typically, younger workers have lower tax rates at the early stage of their careers. As such, they prepay taxes at a lower rate (compared with tax rates at later stages of their careers — even if no tax rule changes), and any capital gains accumulated in the account are tax free upon withdrawal. Younger workers also have a longer investment horizon, so starting investing early really helps.

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Not everyone’s Roth can be subject to astonishing returns like Peter Thiel‘s, and Congress is considering adding restrictions to the Roth IRA. However, these cases should not prevent younger workers from starting contributions to a Roth IRA early on.

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