It's no secret that Social Security is in trouble.
The Social Security trust fund is projected to run dry within the next 10 years, which can be alarming. But to be clear, you'll still be able to receive about 77% of benefits you were promised, according to the latest trustees' report, so you don't have to worry about benefits going away completely.
However, no matter what the future of Social Security looks like or how many years you have until retirement, it's never too early to start exploring your retirement savings options. A Roth IRA, for example, could provide you with tax-free retirement income that can supplement your Social Security benefits.
If you're ready to get started, I've jotted down two Roth IRA moves that you should consider right now so you don't have to rely solely on Social Security.
Image source: Getty Images.
1. Contribute as much as possible to a Roth IRA
A Roth IRA (individual retirement account) is one of the most coveted retirement savings accounts out there. You can contribute after-tax dollars to the account today in exchange for tax-free dollars when you retire.
Let's say you build a six-figure nest egg. You'll be able to withdraw any of your money from your Roth IRA 100% tax-free after you've turned 59 1/2 and have met the requirements of the five-year rule. On top of that, the distributions from a Roth IRA won't affect your Social Security benefits.
In 2024, retirement savers who have enough earned income may put up to $7,000 in a Roth IRA (or $8,000 if you're 50 or older). But keep in mind that your maximum allowable contribution may be reduced or "phased out" if your modified adjusted gross income (MAGI) exceeds the limitation for 2024.
So if you qualify to contribute money to a 2024 Roth IRA, you may want to shoot for the maximum contribution amount this year. Here are a few tips to beef up your Roth IRA contributions:
- Create a budget so you can have a plan for your money.
- Track your spending.
- Trim unnecessary expenses.
- Funnel extra income or bonuses into your account.
- Set up recurring contributions from a checking to a Roth IRA.
You have until April 15, 2025 to contribute money to a 2024 Roth IRA so that gives you some time to get your finances together. But you don't want to wait too long to make contributions. The faster you can meet your Roth IRA contribution goals, the sooner you can invest the money in your account and work on other retirement savings goals.
2. Invest your Roth IRA contributions
Maxing out your Roth IRA can be a major retirement milestone, but you can't stop there. If you want to grow your Roth IRA balance over time and create another stream of income during retirement, you need to invest the funds in your account.
Dividend-income investing may be a great option for you if you don't want to depend on Social Security benefits alone. With dividends, you can earn an extra stream of income every month or quarter as long as the company continues to declare dividends. The income from your Roth IRA could help you pay a few bills during retirement. But to pull this off, you have to invest the money in your account and look into dividend reinvestment to give your portfolio a chance to grow faster.
Let's say a company declares a quarterly dividend of $1 per share. If the company pays dividends quarterly and you own 1,000 shares, you can expect to receive $1,000 worth of dividend income in your Roth IRA every three months. If you reinvest your dividends, you will automatically receive more shares of the company stock with your dividend income. Now your dividend income can help you produce more dividend income in your portfolio. If you need to use the money during retirement, you can shut off dividend reinvestment and withdraw the funds as needed. As long as you keep the dividend stocks in your company, you'll continue to receive dividend income when the board of director declares it.
Although Social Security benefits are not going away completely, it's hard to tell exactly how much you can expect to receive in the future. By looking into other retirement savings options, such as a Roth IRA, you can protect yourself from the risk of depending on Social Security benefits only. No matter what happens, knowing you have an extra stream of income that's tax-free during retirement can make your future plans a bit sweeter.
FAQs
In 2024, retirement savers who have enough earned income may put up to $7,000 in a Roth IRA (or $8,000 if you're 50 or older). But keep in mind that your maximum allowable contribution may be reduced or "phased out" if your modified adjusted gross income (MAGI) exceeds the limitation for 2024.
How much can I earn while on Social Security in 2024? ›
In 2024, if you're under full retirement age, the annual earnings limit is $22,320. If you will reach full retirement age in 2024, the limit on your earnings for the months before full retirement age is $59,520.
What is the 5 year rule for Social Security? ›
You must have worked and paid Social Security taxes in five of the last 10 years. If you also get a pension from a job where you didn't pay Social Security taxes (e.g., a civil service or teacher's pension), your Social Security benefit might be reduced.
Does Roth IRA distributions affect Social Security? ›
When it comes to IRA distributions, here's how it works: Roth IRA distributions are not included in your combined income, so they have no impact on whether your Social Security is taxable. However, traditional IRA distributions are generally included in your AGI, so they're included in combined income.
When to contribute to Roth IRA 2024? ›
What is the deadline to make a contribution? The deadline to contribute to your Roth IRA is typically April 15 of the following tax year. However, it is better to contribute earlier rather than later, so you can take advantage of tax-free growth potential for a longer period of time.
What is substantial gainful activity in 2024? ›
What is Substantial Gainful Activity (SGA)? For most disability applicants, the Social Security Administration (SSA) definition of substantial gainful activity means earning above a specific dollar amount. In 2024, this amount is $1,550 or more a month, or $2,590 if you're blind.
Will Social Security be taxed in 2024? ›
Starting in 2024, tax Social Security benefits in a manner similar to private pension income.
At what age is Social Security no longer taxed? ›
At what age is Social Security no longer taxable? Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
How do I get the $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
When my husband dies, do I get his Social Security and mine? ›
If your spouse dies, do you get both Social Security benefits? You cannot claim your deceased spouse's benefits in addition to your own retirement benefits. Social Security only will pay one—survivor or retirement. If you qualify for both survivor and retirement benefits, you will receive whichever amount is higher.
The Bottom Line. If you have a Roth IRA, you can withdraw your contributions at any time and they won't count as income. Also, the account's earnings can be tax free when you withdraw them as long as you are age 59½ or older and have had a Roth account for at least five years.
Can you collect Social Security and Roth IRA at the same time? ›
Yes, you could potentially retire early at 62 with $1 million in a Roth IRA and $2,250 in monthly Social Security benefits. But you may need to restrict your spending and live a more limited retirement than you may want to.
What kind of income reduces Social Security benefits? ›
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if you're self-employed. We include bonuses, commissions, and vacation pay.
What time of year is best to contribute to Roth IRA? ›
By: Shelly Gigante. Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites. Highlight how much more your savings could grow if you fund your IRA in January of each tax year, rather than waiting to make a prior year contribution.
Is Backdoor Roth still allowed in 2024? ›
Another option, if your employer's plan offers it, is the mega backdoor Roth. Under this option you would make after-tax contributions into your employer's 401(k) plan. For 2024 the limit for these after-tax contributions is $46,000.
What is a backdoor Roth IRA? ›
A backdoor Roth IRA is a conversion that allows high earners to open a Roth IRA despite IRS-imposed income limits. Basically, you put money you've already paid taxes on in a traditional IRA, then convert your contributed money into a Roth IRA, and you're done.
How much can I earn without affecting my Social Security? ›
If you're younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you're younger than full retirement age during all of 2024, we must deduct $1 from your benefits for each $2 you earn above $22,320.
Is the Social Security spousal rule ending in 2024? ›
A Social Security spousal rule that has been around for decades officially ends this year for everyone except those who turned 70 on Jan. 1, 2024. The rule allows recipients to switch between their benefits and their spouses to receive the maximum amount. But unless you were born before Jan.
What is the earnings limit for FERS supplement 2024? ›
In 2024, the Social Security earnings limit is $22,230. Earn at or below that amount in 2024 and it will have no affect on your special retirement supplement for 2025.
