When it comes to retirement planning, one account stands out as the best in class to hold your retirement money: the Roth IRA. In many ways, a Roth IRA is the icing on your retirement cake, as it sits at the sweet spot of taxation and flexibility that makes it a wonderful place to hold your financial assets.
Like the sort of icing you put on cake, though, there can be too much of a good thing. Focusing exclusively on Roth IRAs over every other form of retirement savings can lead to a less rewarding retirement due to the tax costs associated with getting money into your Roth IRA. Finding the right balance point is key, and it’s one of the reasons a Roth IRA is icing on the retirement cake.
1. Contributions are limited
If you’re under age 50, you can only contribute $6,000 per year to your Roth IRA, and if you’re 50 and up, that limit becomes $7,000. Even then, there are income limits that restrict direct Roth IRA contributions, starting with those who earn $125,000 (single) or $198,000 (married filing jointly). Earners who are married but file separate returns generally can’t contribute, regardless of their income levels.
Those limits make it challenging to build up a big balance inside your Roth IRA during your working years. Still, the balance you do build can provide an incredible foundation for both your retirement and your estate plans. That makes it worthwhile to figure out ways to get what money you can into that a Roth IRA.