Investor Insights Blog|3 Reasons to Consider a Roth IRA Before the Tax Deadline This Year
Tax-Advantaged Accounts
3 Reasons to Consider a Roth IRA Before the Tax Deadline This Year
Is now a good time to start a Roth IRA?
For those interested in IRAs and saving for retirement, much of the focus during tax season is on the potential tax deductions received by contributing to a Traditional IRA or other tax-deferred account.
While a common starting point, the tax-advantaged potential of IRAs isn’t limited to tax-deferred contributions, or in other words the tax deductions.
Should you consider a Roth IRA?
In fact, there are several reasons why it may be a good time to consider opening and funding a Roth IRA with an after-tax contribution before the April 15 tax deadline, assuming you qualify.
Why April 15? Because, if you haven’t reached the annual contribution limit for 2024, it may still be possible to contribute to a new or existing IRA for the 2024 tax year before the tax filing deadline on April 15, 2025.
Unlike a Traditional IRA, contributions to a Roth IRA are made after-tax and do not provide a tax deduction. However, investments within a Roth IRA grow tax-free and funds distributed after age 59½ are also tax-free, as long as the account has been established for at least five years (more on that later) and IRS rules are followed.
With a self-directed Roth IRA at Equity Trust, you have the freedom to invest, tax-free, in both traditional assets and alternative assets such as real estate, notes/private debt, private equity, digital currency, and more.
Here are three reasons to consider opening and contributing to a Roth IRA this tax season:
1. Make up for lost time and boost your tax-free retirement savings.
If you ever thought about opening a Roth IRA but didn’t last year, you may still be able to establish your account and contribute for 2024 before the April 15, 2025 deadline.
Making 2024 contributions to a Roth IRA provides an opportunity to make up for lost time and boost your tax-free retirement savings, without reducing the amount you can contribute in 2025.
From a tax reporting perspective, it will be as if you started the account in 2024. This lets you catch up on missed saving opportunities from 2024, and maximize your 2025 Roth contributions as well, assuming you are still eligible to contribute.
Video: Considering a Roth IRA This Tax Season
2. Don’t qualify for a tax deduction on your Traditional IRA contributions? It may be time to consider a Roth.
Did you know the IRS limits who can receive a tax deduction from Traditional IRA contributions for those covered by a retirement plan at work?
Retirement savers who exceed the modified adjusted gross income (MAGI) limits and don’t qualify for a full or partial deduction on their Traditional IRA contributions may want to consider contributing to a Roth IRA instead.
If the benefit of a tax deduction on Traditional IRA contributions is reduced or no longer available, ask your adviser if it makes sense to contribute to a tax-free Roth IRA instead of a tax-deferred Traditional IRA without the deduction.
For those covered by a retirement plan at work, the MAGI limits for Roth IRA eligibility are significantly higher than the MAGI limits that phase-out the ability to deduct Traditional IRA contributions.
For example, single filers are not eligible for a tax deduction on Traditional IRA contributions in 2024 if their modified adjusted gross income is $87,000 or greater.
3). Save a full year and start your Roth IRA “five-year seasoning” in 2024.
Establishing a Roth IRA and making 2024 contributions before the April 15, 2025 deadline retroactively sets the start date for the five-year seasoning period to January 1, 2024.
If you wait until the 2025 tax year to open your account and make your first contribution, the five-year seasoning period starts a full year later on January 1, 2025.
Distributions from a Roth IRA, even those after age 59½, aren’t fully tax- and penalty-free until after the account has been established – or “seasoned” – for five years.
Roth IRAs allow investors to withdraw the money they contribute out-of-pocket into the account (not earnings) tax- and penalty-free, but only after the account has been established for five years.
For those who decide a Roth IRA is right for them, making 2024 contributions before the April 15 deadline could save an entire year on the five-year seasoning period and bring them one year closer to tax-free wealth.
Video: Roth 5-Year Seasoning Rule Explained
Finally, it might be a good time to consider a Roth IRA if you dropped to a lower tax bracket. Or, if you currently fall under the MAGI limits to be eligible to contribute to a Roth IRA, you may consider starting a Roth IRA while you still qualify.
How do I set up a self-directed retirement account?
To set up a self-directed retirement account with Equity Trust visit myEQUITY and start the process today. You can also visit How to Get Started for more information. Or simply schedule a free, one-on-one consultation with an Equity Trust Senior Account Executive.
2
Can I roll over a 401(k) account into a self-directed IRA?
Yes. A self-directed IRA gives you the ability to diversify your portfolio with additional investments that are permitted by the IRS, in a tax-free or tax-deferred environment.
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What are the advantages of opening a self-directed IRA?
Some advantages of self-directed IRAs include:
Tax-deferred or tax-free profits
Investment diversity (it is possible to invest in an array of assets in your retirement account)
Potentially building wealth for future beneficiaries
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