Your best bet for securing financial success later in life is to begin building your retirement savings early in your career. Many employers offer 401(k) accounts, often with a contribution match, but that isn’t always enough. In addition to this retirement account, or perhaps in place of it if you’re employer doesn’t offer one, consider opening a Roth individual retirement account (IRA) to save even more.

What is a Roth IRA?

A Roth IRA is a tax-advantaged savings account to which you contribute after-tax dollars (unlike traditional 401(k)s and IRAs, which take pretax dollars). This means that any money you withdraw in the future from your Roth IRA will be tax-free and penalty-free as long as you’re 59½ years or older and have had the account for five years. However, there’s no age you have to begin taking distributions, nor are there age restrictions on contributions, so you can contribute for as long as you want if you have an income.

Opening an account

If you’re considering opening a Roth IRA, then there are a few important considerations and regulations to keep in mind.

There’s a cap to contributions
For 2023, the maximum annual contribution allowed by the IRS is $6,500, which increases to $7,500 if you’re fifty or older. This marks a $500 increase from previous years.

Your allowed maximum may be lower
To contribute the maximum amount, you must meet certain requirements according to your modified adjusted gross income and tax filing status. You must 1) be married filing jointly or widowed and make less than $218,000 a year or 2) be single, head of household, or married filing separately (and didn’t live your spouse that year) and make less than $138,000 annually.

Your contributions are investments
Roth IRA savings only grow because the contributions you’re making are being invested. You can put them in stocks, bonds, mutual funds, and more depending on the brokerage your account is with. These investments will fluctuate over time, meaning your balance can either increase beyond your contributions or, unfortunately, decrease. However, as long as you keep consistently making contributions (and invest them wisely), you should still see net growth in your savings.

Not all funds are eligible for contribution
If working for an employer, you can contribute to a Roth IRA from your salary, commissions, and bonuses. If self-employed, you can contribute with income earned via your business. However, funds gained via rental income, interest income, pensions, and stock dividends aren’t eligible for contribution.

Contributions aren’t tax deductible
Because your contributions are made with after-tax dollars, you won’t report your contributions on your tax return since they’re not tax deductible for the year that you make them. On the plus side, though, a Roth IRA is ideal if you’re looking for tax-free income once you do retire or if you expect to change tax brackets later in life.

There’s no required minimum distribution
Unlike traditional IRAs, which require you to start withdrawing from your account at seventy-two, there’s no required minimum distribution for a Roth IRA. This means you only have to take out money when and if you need it. The money in your account can continue to grow indefinitely, allowing you to pass it on to your beneficiary in full if you’d like.

There are numerous retirement investment options available, so if you’re unsure which accounts are right for you, be sure to work with a financial advisor. They can help you better understand your options and determine what accounts may work best for you and your financial situation.