One rule I always follow when it comes to retirement is “It’s always better to be overprepared than underprepared.” Of course, this applies to many areas of life, but it’s especially critical when it comes to retirement finances.
One of the surest ways to make sure you’re as financially prepared as possible for retirement is to take advantage of retirement accounts. It’s a two-for-one benefit: You set money aside from retirement while simultaneously receiving a tax break.
You can choose from handfuls of retirement accounts, but the Roth IRA is by far my favorite heading into 2025 and beyond.
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A Roth IRA could save you thousands in taxes in retirement
A Roth IRA has a unique tax break you don’t receive with other retirement accounts, such as 401(k)s or traditional IRAs. With a Roth IRA, you contribute after-tax money and then are able to take tax-free withdrawals in retirement, as long as you’re 59 1/2 years old and made your first contribution at least five years prior.
Having tax breaks up front (like a 401(k) or traditional IRA) has its benefits, but taking tax-free withdrawals in retirement after your money has had a chance to grow and compound is a retirement cheat code.
As an example, let’s imagine you’re able to accumulate $400,000 in your Roth IRA (which is very possible if you’re contributing throughout your career). If that were in a 401(k) or traditional IRA, you’d owe taxes on any withdrawals made in retirement. If you’re in the 12% tax bracket at the time, that could be $48,000 owed in taxes.
However, the full $400,000 would be tax-free in a Roth IRA because you already paid taxes on the money you contributed. Depending on your tax bracket, a Roth IRA could save you massive amounts in taxes.
Don’t underestimate the power of freedom of choice
Tax break aside, one aspect of a Roth IRA I appreciate — especially compared to a 401(k) — is the freedom to choose virtually any investment you want in your account. In a 401(k), you’re given investment options to choose from, typically consisting of company stock (if it’s a public company), a handful of index funds, and bond options.
There’s nothing wrong with set options, but a Roth IRA operates closer to a brokerage account and allows you to make sure your investments match your financial goals, risk tolerance, and time horizon.
Want to invest in your favorite ETF? No problem. Want to invest in the tech sector? Consider it done. Want to invest in an emerging or niche industry? There’s probably an investment option for that.
The most you can contribute to an IRA (both Roth and traditional) in 2025 is $7,000. If you’re 50 or older, you can add an additional $1,000 catch-up contribution. The relatively low contribution limit means it probably shouldn’t be your primary retirement account if possible, but benefits like the range of investments make it worth taking advantage of.
Be aware of the Roth IRA’s income limit rule
One of the downsides of a Roth IRA is its income limit on contributions. Beginning in 2025, below are the maximum amounts you can earn and still be eligible to contribute to a Roth IRA:
| Filing Status | Phase-Out Range Begins | Maximum Income for Eligibility |
|---|---|---|
| Single and Heads of Household | $150,000 | $165,000 |
| Married, Filing Jointly | $236,000 | $246,000 |
| Married, Filing Separately | $0 | $10,000 |
Source: IRS.
The phase-out range is where you’re still eligible to contribute to a Roth IRA, but the amount you’re allowed to contribute begins to lower. For example, if you’re single and make $157,500, you’d be halfway in the phase-out range. This means your contribution limit for the year would be $3,500 instead of $7,000.
The income limit is more reason to take advantage of a Roth IRA because you may find yourself ineligible one day (which is a good thing, all things considered). The good news is that any money you have in a Roth IRA will continue to grow, even if you’re no longer eligible to contribute.