When to Open a Roth IRA? A Key Deadline Is in a Month

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When to Open a Roth IRA? A Key Deadline Is in a Month

Roth IRAs help you avoid taxes, and a key deadline is exactly one month away.

April 15 is tax day in the U.S. It’s also the last chance to fund your Roth IRA for 2018.

“IRA” stands for individual retirement account. There are two types: traditional and Roth.

“Traditional” IRAs let you contribute pre-tax money, effectively reducing your income tax in the present day. But then down the road, when you’re over the 59 1/2 retirement age, you’ll owe Uncle Sam on withdrawals. That makes it comparable to a 401(K). It’s good now and definitely has benefits, but it’s not as awesome as a Roth in the long term.

Roth IRA’s are amazing because you’ll never owe tax on gains down the road. Long-term profits are 100 percent yours, no matter how much your nest egg grows.

These instruments, named after Delaware Senator William Roth, use post-tax money in the present day. They don’t have any benefit now, but they can really pay off down the road.

After all, saving for retirement is a long-term endeavor. It benefits from compounding when done faithfully over time. Old profits increase your principal, which in turn results in bigger gains on future returns. Investors don’t necessarily see it happen from one year to the next, but over decades it can really add up.

That’s why Roth IRAs should be at the top of everyone’s to-do list.

Restrictions for High Earners

Still, there are some restrictions — especially the limit on contributions. Last year’s maximum was $5,500 for people under 50 years of age, and $6,500 for older savers. (Those caps inch up by $500 for calendar 2019.)

Second, higher-income people are allowed to put less money away. The IRS publishes a graduated scale that dings married couples with adjusted gross income over $193,000, while single filers start losing their ability to contribute above $122,000.

The upper cap is $203,000 for a married couple and $137,000 for a single person. An AGI over that amount bars you from putting money into a Roth IRA.

Given the fact that savers may not know their status until tax time, they’re allowed to fund their accounts retroactively on the same deadline.

And, as of today, that deadline is exactly one month away. There’s still time, but the clock is ticking!

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.