Everyone (Who's Not Retired) Should Have a Roth IRA. Start the 5 Year Clock Now
The U.S. tax code is in a constant state of flux, making long-term tax planning feel more like educated guesswork than precision strategy. But amid all the uncertainty, one small yet powerful move that nearly every working American can do that will have an outsized impact later is to contribute just a few thousand dollars to a Roth IRA—even if it's just once.
Roth IRAs allow for both tax-free growth and withdrawals in retirement, provided that certain conditions are met. One of those conditions is that the account must be open for five years; but the “five-year clock” doesn’t restart with each contribution. Instead, it begins at year one and applies across all Roth IRAs you hold.
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Thus, starting it now with a nominal amount ensures that when you want to tap into those funds later—for retirement, a first-time home purchase, or during a low-income gap year—you won’t be forced to wait. Having that time stipulation satisfied as early as possible can offer valuable flexibility later.
Roth IRAs offer several distinct advantages over traditional pre-tax retirement accounts. While contributions to a traditional IRA or 401(k) reduce taxable income in the year they are made, withdrawals in retirement are taxed as ordinary income. In contrast, Roth IRAs are funded with after-tax dollars, so the money inside grows tax-free, and more importantly, can be withdrawn tax-free in retirement.
Yet despite its well-documented advantages, it remains underutilized by high-income earners who assume, often incorrectly, that they are ineligible to benefit. For individuals whose income exceeds the direct contribution limits, there is still the opportunity to take advantage of what is known as a backdoor Roth contribution.
This strategy involves making a non-deductible contribution to a traditional IRA and subsequently converting those funds into a Roth IRA. When implemented correctly, it offers the same tax-free growth and withdrawal benefits to those who contribute directly.
Funds held within a Roth IRA not only eliminate the uncertainty of future tax obligations but also avoid required minimum distributions, giving account holders greater control over their income and tax exposure later in life. For individuals seeking predictability, especially those who expect to be in the same or a higher tax bracket in the future, Roth IRAs can be a more tax-efficient vehicle for long-term wealth accumulation.
Diversification is a well-established principle in portfolio construction, but it should extend beyond asset classes and investment types to also include account types. Allocating investments across accounts with different tax treatments, such as traditional IRAs, Roth IRAs, and taxable brokerage accounts, provides tremendous flexibility from a planning perspective.
The ability to choose which account to draw from in any given year allows retirees to remain in lower tax brackets, preserve capital, and better manage longevity risk. Incorporating a Roth IRA into your broader financial strategy today adds an invaluable layer of optionality that is difficult to accurately quantify.
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Malcolm Ethridge, CFP® is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
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