3 Big Reasons to Contribute to a Roth IRA in 2022

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Mall retirement savers love the Roth IRA because you can accumulate tax-free income and benefits during retirement. A Roth IRA (Individual Retirement Account) is a special type of retirement account that you can create yourself. As long as you have earned income and do not exceed the income thresholds, you can contribute directly to the account.

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

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

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1. You might not be eligible next year

It’s easy to believe that the Roth IRA will be accessible forever, but that’s not the case. If you take a better-paying job next year or get an unexpected pay raise, you may lose your chance to contribute directly to a Roth IRA.

The Roth IRA was intended to help people with low to moderate incomes save money for retirement. This is ideal if you expect to pay higher taxes later. If your income falls within the threshold, now 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 your modified adjusted gross income (MAGI) is less than $129,000. But you won’t be able to make the maximum contribution once your income reaches $129,000. You will be eligible for reduced contribution amounts. Your contribution limit will drop to zero when your income exceeds $144,000.

Take a look at the 2022 Roth IRA phase-out ranges. If your income is below the phase-out range, you can contribute the maximum amount for 2022. If your income exceeds the thresholds, you’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. Table by author.

There is a thin line between making maximum contributions to the Roth IRA and not being able to make direct contributions. This is why it is important to contribute as much as possible before your time expires.

2. Boost your portfolio with your favorite assets

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

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

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

Many stocks have fallen from their 52-week highs, so now may be the perfect time to step in. Be prepared to do your research and diversify your portfolio with investments that match your goals and risk tolerance. Doing your homework now can bring you closer to above-market returns later.

3. The Roth IRA Five-Year Rule

Suppose you open and fund your Roth IRA at age 56. Generally, you can withdraw money without tax or penalty at 59 1/2, but not in this case. According to the five-year rule, you must wait five years (that is, until age 61) after your first contribution to the account to withdraw your earnings and growth from your Roth IRA.

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

It’s easy to overlook the five-year rule when designing your retirement plan. But if you want tax-free withdrawals, you should start contributing in 2022 to start the five-year clock.

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