3 Big Reasons to Contribute to a Roth IRA in 2022 | Smart Change: Personal Finance

(Charlene Rhinehart, CPA)

Many retirement savers love the Roth IRA because you can accumulate tax-free earnings and profits during retirement. To Roth IRA (individual retirement account) is a special type of retirement account that you can set up on your own. As long as you have earned income and don’t exceed the income thresholds, you can make direct contributions to the account.

The IRS doesn’t limit the amount of money you can earn in a Roth IRA. This has been a win for tech billionaires like Peter Thiel, who was put through public scrutiny for his $5 billion Roth IRA last year. Even if you can’t reach Thiel’s Roth IRA fortune, you can build up a healthy nest egg if you crush your Roth IRA goals in 2022.

Here are three big reasons to take advantage of the Roth IRA this year if you qualify.

Image source: Getty Images.

1. You may not be eligible next year

It’s easy to believe the Roth IRA will be accessible forever, but that’s not the case. If you take on a higher-paying job next year or get an unexpected pay bump, you may forfeit your chance to make a direct contribution to a Roth IRA.

The Roth IRA was intended to help low-and-moderate-income earners stash away money for retirement. It’s ideal if you expect to pay higher taxes later. If your income is within the threshold, this is a good time to explore the benefits of a Roth IRA and see if it’s right for you.

For 2022, you can join the Roth IRA contribution club if you’re single and have modified adjusted gross income (MAGI) under $129,000. But you won’t be able to make the maximum contribution after your income hits $129,000. You’ll qualify for reduced contribution amounts. Your contribution limit will drop to zero after your income exceeds $144,000.

Take a look at the 2022 Roth IRA phaseout ranges. If your income is below the phaseout range, you can contribute the maximum amount for 2022. if your income exceeds the thresholdsyou’ve missed your chance to make a direct contribution for 2022.

Filing Status

2022 Income Range

2021 Income Range

Single or head of household

$129,000 to $144,000

$125,000 to $140,000

married filing jointly

$204,000 to $214,000

$198,000 to $208,000

Data source: IRS. Chart by author.

It’s a thin line between making maximum Roth IRA contributions and not being able to make any direct contributions. That’s why it’s important to contribute as much as possible before your time expires.

2. Supercharge your portfolio with your favorite assets

If you want to have a shot at a million-dollar Roth IRA, you have to start tucking away money now. The more money you save and the earlier you start, the more money you’ll have to invest and grow your portfolio.

In 2022, you can contribute up to $6,000 to a Roth IRA if you’re under 50. Your contribution limit rises to $7,000 if you are 50 or over.

Your money can be used to invest in your favorite assets, including:

Many stocks have dropped from their 52-week highs, so this may be an ideal time to jump in. Be prepared to do your research and diversify your portfolio with investments that align with your goals and risk tolerance. Doing your homework now may get you closer to market-beating returns later.

3. The Roth IRA five-year rule

Suppose you open and fund your Roth IRA at 56 years old. Typically, you can withdraw money tax- and penalty-free at 59 1/2, but not in this case. Based on the five-year ruleyou have to wait five years (meaning until age 61) after your first contribution to the account to take out your earnings and growth in your Roth IRA.

Your five-year clock starts on Jan. 1 of the year of contribution. Let’s say you contribute to your Roth IRA in November 2022. Your five-year clock starts in January 2022, making you eligible to withdraw earnings tax-free in January 2027.

It’s easy to forget about the five-year rule when developing your retirement plan. But if you want tax-free withdrawals, you should start making contributions in 2022 to start the five-year clock.

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