Personal Finance

If you haven’t made a 2017 contribution to a Roth IRA, it’s not too late. You have until this year’s April 17 tax deadline to contribute to this tax-friendly individual retirement account and boost your retirement savings.

2017 Roth IRA Contribution Limits and Income Limits

The maximum amount workers can contribute to a Roth IRA for 2017 is $5,500 if they’re younger than age 50. Workers age 50 and older can add an extra $1,000 per year in “catch-up” contributions. The maximum contribution amounts are unchanged for 2018.

SEE ALSO: 9 States with No Income Tax

The actual amount that you are allowed to contribute to a Roth IRA is based on your income. To be eligible to contribute the maximum for 2017, your modified adjusted gross income last year must have been less than $118,000 if single or less than $186,000 if married and filing jointly.

If your 2017 income was above those limits, you may still qualify for a partial contribution if you’re single and your MAGI was greater than or equal to $118,000 but less than $133,000, or if you’re filing jointly and your MAGI was greater than or equal to $186,000 but less than $196,000. You can’t contribute to a Roth IRA once income hits $133,000 for singles or $196,000 for joint filers.

Income limits are higher for making a Roth IRA contribution for 2018. You can contribute the maximum if your income is less than $120,000 if single or $189,000 if married and filing jointly. Contributions begin to be phased out above those amounts, and you can’t put any money into a Roth IRA once your income reaches $135,000 if single or $199,000 if married and filing jointly.

Unlike a traditional IRA, the contributions for which may be tax-deductible, a Roth IRA has no up-front tax break. Money goes into the Roth after it has already been taxed. But when you start pulling money out in retirement, your contributions and all the earnings will be tax-free.

You can open a Roth IRA through a bank, brokerage, mutual fund or insurance company, and you can invest your retirement money in stocks, bonds, mutual funds, exchange-traded funds and other approved investments.

Roth IRAs vs. Traditional IRAs

Roth IRAs can help you build a sizable nest egg if you start saving early enough. For example, a 25-year-old who contributes $5,500 a year to a Roth IRA and has an annual return of 6% will accrue a nest egg of $902,262 by age 65. If that 25-year-old is in the 22% tax bracket and invested $5,500 a year in a taxable account earning a 6% annual return, the balance after 40 years would amount to about $643,500.

The difference is the brake that having to pay the IRS on each year’s earnings puts on compounded growth. If you can’t afford to save the entire $5,500 without the help of a tax deduction (which, if you contribute to a traditional IRA and write off $5,500 in the 22% bracket brings the out-of-pocket cost to $4,290), you might be better off with a traditional IRA.

Roths are also more flexible than traditional, deductible IRAs. You can withdraw contributions to a Roth account anytime, tax- and penalty-free. If you want to withdraw earnings tax-free, though, you must be at least age 59½, and you must have owned the Roth for at least five years. The clock on the five-year holding period starts ticking on January 1 of the year you open the account.

SEE ALSO: How Much Can You Contribute to a Traditional IRA?

Also, Roths—unlike traditional IRAs—are not subject to required minimum distributions (RMDs) after age 70½. And you can add funds to it at any age, provided you have earned income from, say, a job or self-employment. Traditional IRAs close the door to new contributions once you turn 70½, even if you’re working.

Why Save for Retirement in a Roth IRA?

Ed Slott, who is a CPA and an IRA expert in Rockville Centre, N.Y., recommends Roth IRAs for savers of all ages. But, he adds, “the younger you are when you start investing in one, the more advantageous it’ll be because that creates more time for your contributions to compound tax-free.”

There isn’t a minimum age limit to open a Roth IRA, and you can contribute to another person’s Roth account as a gift—perfect for parents looking to kick-start a child’s retirement savings. Two caveats: Recipients must have earned income, and you can only contribute an amount up to that person’s annual earnings or $5,500, whichever is less.

Roths can also provide valuable tax diversification in retirement. Roth IRAs are great “for people who want to balance out their sources of income—meaning that they may already have considerable sources of income that will be taxable in retirement, like a pension, 401(k)s or Social Security, and they want to build up another pot of money that will permit tax-free withdrawals,” says Mari Adam, a certified financial planner in Boca Raton, Fla.

Adam also recommends Roth accounts to anyone planning to leave money to heirs. Though heirs other than a spouse must take distributions from the IRA over time, that money comes out free of any taxes.

SEE ALSO: 13 States That Tax Social Security Retirement Benefits

Finally, note that if you invest in both a Roth IRA and a traditional IRA, the total amount of money you contribute to both accounts can’t exceed the annual limit. If you do exceed it, the IRS might hit you with a 6% excessive-contribution penalty.

Roth IRA Savings Tips

To make the most of saving for retirement in your Roth IRA:

• Max out your contributions. For each year that you’re able, aim to hit the $5,500 limit.
• Once you turn 50, add another $1,000 to that limit annually. You can add funds to your account for as long as you live and have earnings from work.
• Avoid withdrawing funds you contributed to your account, even though you can do so without penalties or taxes. Letting that money grow in the account over many years means a bigger nest egg in retirement.