It's no secret that Social Security is in trouble.
The Social Security trust fund is projected to run dry within the next 10 years, which can be alarming. But to be clear, you'll still be able to receive about 77% of benefits you were promised, according to the latest trustees' report, so you don't have to worry about benefits going away completely.
However, no matter what the future of Social Security looks like or how many years you have until retirement, it's never too early to start exploring your retirement savings options. A Roth IRA, for example, could provide you with tax-free retirement income that can supplement your Social Security benefits.
If you're ready to get started, I've jotted down two Roth IRA moves that you should consider right now so you don't have to rely solely on Social Security.
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1. Contribute as much as possible to a Roth IRA
A Roth IRA (individual retirement account) is one of the most coveted retirement savings accounts out there. You can contribute after-tax dollars to the account today in exchange for tax-free dollars when you retire.
Let's say you build a six-figure nest egg. You'll be able to withdraw any of your money from your Roth IRA 100% tax-free after you've turned 59 1/2 and have met the requirements of the five-year rule. On top of that, the distributions from a Roth IRA won't affect your Social Security benefits.
In 2024, retirement savers who have enough earned income may put up to $7,000 in a Roth IRA (or $8,000 if you're 50 or older). But keep in mind that your maximum allowable contribution may be reduced or "phased out" if your modified adjusted gross income (MAGI) exceeds the limitation for 2024.
So if you qualify to contribute money to a 2024 Roth IRA, you may want to shoot for the maximum contribution amount this year. Here are a few tips to beef up your Roth IRA contributions:
- Create a budget so you can have a plan for your money.
- Track your spending.
- Trim unnecessary expenses.
- Funnel extra income or bonuses into your account.
- Set up recurring contributions from a checking to a Roth IRA.
You have until April 15, 2025 to contribute money to a 2024 Roth IRA so that gives you some time to get your finances together. But you don't want to wait too long to make contributions. The faster you can meet your Roth IRA contribution goals, the sooner you can invest the money in your account and work on other retirement savings goals.
2. Invest your Roth IRA contributions
Maxing out your Roth IRA can be a major retirement milestone, but you can't stop there. If you want to grow your Roth IRA balance over time and create another stream of income during retirement, you need to invest the funds in your account.
Dividend-income investing may be a great option for you if you don't want to depend on Social Security benefits alone. With dividends, you can earn an extra stream of income every month or quarter as long as the company continues to declare dividends. The income from your Roth IRA could help you pay a few bills during retirement. But to pull this off, you have to invest the money in your account and look into dividend reinvestment to give your portfolio a chance to grow faster.
Let's say a company declares a quarterly dividend of $1 per share. If the company pays dividends quarterly and you own 1,000 shares, you can expect to receive $1,000 worth of dividend income in your Roth IRA every three months. If you reinvest your dividends, you will automatically receive more shares of the company stock with your dividend income. Now your dividend income can help you produce more dividend income in your portfolio. If you need to use the money during retirement, you can shut off dividend reinvestment and withdraw the funds as needed. As long as you keep the dividend stocks in your company, you'll continue to receive dividend income when the board of director declares it.
Although Social Security benefits are not going away completely, it's hard to tell exactly how much you can expect to receive in the future. By looking into other retirement savings options, such as a Roth IRA, you can protect yourself from the risk of depending on Social Security benefits only. No matter what happens, knowing you have an extra stream of income that's tax-free during retirement can make your future plans a bit sweeter.
FAQs
In 2024, retirement savers who have enough earned income may put up to $7,000 in a Roth IRA (or $8,000 if you're 50 or older). But keep in mind that your maximum allowable contribution may be reduced or "phased out" if your modified adjusted gross income (MAGI) exceeds the limitation for 2024.
Should I be worried my Roth IRA is going down? ›
Roth IRAs are not 100% safe, but they offer the potential for growth over time. Market fluctuations and early withdrawal penalties can cause a Roth IRA to lose money. Investing late or contributing too much can also result in potential losses.
Is Roth IRA worth it in 2024? ›
If, in 2024, you make less than $38,250, single, or $76,500 as a married couple, you could potentially receive a tax credit for 10-50% of your contributions to a Roth IRA. This credit is a dollar-for-dollar reduction of your taxes owed. A tax credit is more valuable than a tax deduction.
At what income level does a Roth not make sense? ›
Income limits for Roth IRAs
For 2024, the modified adjusted gross income (MAGI) phaseout ranges for Roth IRA direct contributions are: $146,000 to $161,000 for individuals filing as single or head of household. $230,000 to $240,000 for married couples filing jointly.
Does a Roth IRA affect your Social Security? ›
Distributions from Roth IRAs are not taxable and therefore won't cause Social Security benefits to be taxable. The optimal time to do a Roth conversion is after you retire, are in a lower tax bracket, but before claiming Social Security benefits.
Is it possible to lose money in a Roth IRA? ›
Despite the advantages, you can lose some or all of the money you put into a Roth IRA. One possible reason for a decline in the value of a Roth IRA is market volatility. Other losses can be attributed to early withdrawal penalties and investment fees.
Should I stop contributing to my Roth IRA right now? ›
The Bottom Line
If you can contribute to your Roth IRA, you may want to continue doing so to take advantage of the tax-free growth potential. You should also consider whether or not you will need the money in your Roth IRA to cover living expenses in retirement.
What does Suze Orman say about Roth IRA? ›
The true beauty of having your kid invest in a Roth IRA, of course, is the tax-free nature of qualifying distributions. Any amount they manage to build in the account will come to them free and clear in their retirement.
At what age should you stop invest in a Roth IRA? ›
Roth IRAs: Like their traditional counterpart, there is no age limit of Roth IRA contributions. So long as you or your spouse earns income, you can continue to make contributions indefinitely. There are no RMDs with Roth accounts.
What is the downside of a Roth IRA? ›
Roth individual retirement accounts (IRAs) offer several key benefits, including tax-free growth, tax-free withdrawals in retirement, and no required minimum distributions (RMDs). One key disadvantage: Roth IRA contributions are made with after-tax money, meaning there's no tax deduction in the years you contribute.
Roth IRA phase-out ranges
| Filing status | 2023 income range | 2024 income range |
|---|
| Single | $138,000–$153,000 | $146,000–$161,000 |
| Married, filing jointly | $218,000–$228,000 | $230,000–$240,000 |
| Married, filing separately* | $0–$10,000 | $0–$10,000 |
Cash Value. Despite the nickname, the “Rich Person's Roth” isn't a retirement account at all. Instead, it's a cash value life insurance policy that offers tax-free earnings on investments as well as tax-free withdrawals.
Who should not do a Roth IRA? ›
If you're now in one of the higher tax brackets, your tax rate in retirement may have nowhere to go but down. In this case, you're probably better off postponing the tax hit by contributing to a traditional retirement account.
What type of income reduces Social Security benefits? ›
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions, and vacation pay.
Can you collect Social Security and Roth IRA at the same time? ›
Roth IRA distributions have no effect on Social Security benefits, including the earnings test or taxation of benefits. Any unearned income, such as interest or dividends, doesn't affect your ability to collect Social Security, but it can make more of your benefits taxable.
What income does not count against Social Security? ›
For the earnings limits, we don't count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains.
Will a Roth IRA survive a recession? ›
A recession could result in a lower IRA balance, but that's not guaranteed to happen. If a recession does negatively impact your IRA, your best bet is to do nothing. It's a good idea to have an emergency fund for surprise expenses that could pop up during a recession, so you can let your IRA recover.
What should I do if my IRA is losing money? ›
The key, however, is to stay cool when that happens and not rush to sell off investments in that account when they're down. If you do that, you'll lock in your losses. If you sit tight, you can give your IRA a chance to recover, which it's likely to do.
Should I be risky in my Roth IRA? ›
Are Roth IRAs safe? Every investment carries risk, so you have to decide whether a Roth IRA aligns with your financial situation and goals. Also note that a Roth IRA is simply a tax-advantaged account you use to invest; the investments are what carry risk.
Why is my Roth IRA not making money? ›
There are two primary reasons your IRA may not be growing. First, you can only contribute a certain amount of money to your IRA each year. Once you hit that limit, your account cannot grow via personal contributions until the following year. This may also mean you are not making contributions when you believe you were.
