But you should think twice about making taxable brokerage accounts your one and only option. Every penny you earn could be taxed based on your ordinary income tax rate or higher capital gains rates. News is spreading that a tax hike could impact those with $1 million in annual income. With a Roth IRA, you could make $2 million in the future and that wouldn’t impact the taxes on any qualified withdrawals you make.
Let’s cut to the chase and discuss what you can do now to use the Roth IRA to its full potential. For starters, contribute as much as you can. The maximum contribution for most taxpayers under 50 is $6,000 for 2021. The more you save in a Roth IRA, the better the chances you have of generating more tax-free income during retirement. If you contributed $6,000 to a Roth IRA every year and earned a 7% average annual return, you would be well on your way to tapping into a million-dollar tax-free Roth IRA within 40 years.
Gain access to tax-free income
By using a Roth IRA, you pay taxes now and eliminate the guesswork later. Therefore, if your income increases during retirement, you already know that you have secured a source of cash that’s exempt from future tax increases.