Don’t Miss Out on the Tax Break of a Lifetime

As 2024 draws to a close, many individuals are contemplating the year ahead, seeking ways to bolster their financial well-being. Regardless of how distant retirement may seem, now is an opportune moment to take actions that can positively impact it.

One strategic move with long-term benefits is making contributions to a Roth IRA. This retirement account permits tax-free growth of investments, with tax-free withdrawals during retirement once you reach the age of 59 1/2 and have made your initial contribution at least five years prior. Due to the tax advantages inherent in a Roth IRA, contributing now has the potential to save you thousands in the future.

An IRA’s maximum contribution for 2024 is $6,500 ($7,500 if you’re 50 years old or older). In the subsequent tax year of 2024, these limits will rise to $7,000 and $8,000, respectively.

For those who haven’t capitalized on an IRA in the current year, making a contribution before year-end could yield substantial returns down the road. In accordance with the Rule of 72, an investment that returns 10% would double in value in 7.2 years. A one-time investment of $6,500 could potentially grow to over $43,700 in 20 years, assuming consistent returns.

The key difference between investing in a traditional brokerage account and a Roth IRA lies in the tax implications when selling investments or making withdrawals in retirement.

Furthermore, in this scenario, if your $6,500 investment appreciates to $43,700, you would have $37,200 in capital gains. Depending on your applicable capital gains tax rate, you could save between $5,580 and $7,740 in taxes. Beyond the tax benefits, a Roth IRA offers unique advantages. It complements other retirement accounts, such as a 401(k), due to its flexibility.

Unlike a 401(k) that limits your investment options, a Roth IRA allows you to make virtually any investment available in a traditional brokerage account, with exceptions for certain high-risk investments like options. This flexibility ensures your investments align closely with your financial goals, retirement timeline, and risk tolerance.

A Roth IRA also provides greater flexibility for early withdrawals. Your contributions can be accessed without incurring taxes or penalties. While early withdrawals are not recommended for retirement accounts, life often presents unforeseen circumstances, and having access to your funds without penalties can prove invaluable.

In addition to emergencies, penalty-free withdrawals are permitted for first-time homebuyers (up to $10,000) and qualified educational expenses, including tuition, books, and mandatory fees.

Although you can make a Roth IRA contribution for the 2024 tax year until the tax filing deadline next April, there is no need to delay if you have the means to contribute now. Even a modest investment today can yield substantial long-term benefits.