Roth IRA investments are akin to looking out for the future you, as these types of retirement accounts are filled with post-tax dollars, meaning that all your future withdrawals and returns will be tax-free.
The main reason to do this is to make sure your money grows tax-free which can significantly impact the amount you’ll have to go around once you decide to retire.
Another perk of Roth IRAs is that they usually let you lock in your current tax rate, excluding you from additional taxation as the years go by and you amass wealth and income.
The fact that you pay tax on your deposits when investing in a Roth IRA account means that you should aim to do this in a period when your earnings are toned down or even more preferably during times of lower federal income tax rates.
The only catch is that no one can know with certainty what the federal income tax rate will be in the future, but analysts believe that putting money into your Roth IRA sooner than later will be beneficial to your retirement plans.
Even with this in mind, it’s always up to you to take your circumstances into account and make the right decision for your money, and your future.
The annual limit for Roth IRA contributions is currently $6000, increasing to $7000 if you’re over 50, but these limits aren’t applied when transforming your traditional IRA or 401(k).
The most optimal time to convert is when you’re experiencing lower-income, meaning that a financial struggle could possibly be the best possible time to begin thinking about a Roth IRA, even if retirement is probably the last thing on your mind at the time.
When do you invest in the Roth IRA?
Deciding on the best moment to make your yearly contributions can also heavily depend on your current financial position and cash flow.
If for example, you have around $7k lying around that isn’t allocated to any other commodity, investment, or debt clearance, your best bet would be putting it in a Roth IRA as soon as you possibly can, because you’ll be gaining access to near-immediate tax-free growth.
However, if you’re in the majority, you probably can’t say goodbye to $7k that easily, so you might wish to spread out your contributions, which does take advantage of dollar-cost fluctuations.
If you invest a small amount each month, you shield yourself from market volatility, which becomes even more profitable if the asset is on a steady decline compared to when you would have made a lump contribution.
With Roth IRAs, timing is key, and you could easily miss out on all the tax advantages by not looking out for all these aforementioned cues.
If you’re young and just starting off your career, your chances of profiting off a Roth IRA are astronomical, as your income is likely still on the low-end of the spectrum, and you’ll be able to lock in a shockingly low tax rate for your retirement account.