Celebrate more tax-free income with a ROTH IRA in 2020.

Roth IRAs have been around for more than 20 years, and many people may take them for granted. Even modest contributions over time can translate into a substantial amount of tax-free income throughout your retirement. The uber-rich may wish for the tax-free income potential, but they often make too much income to be able to contribute to this type of retirement account. For the rest of us, the responsibility to set up and fund a Roth IRA falls squarely on our shoulders.

Roth IRA BASICS

A Roth IRA is a type of retirement account. Unlike a Traditional IRA or 401(k), you will not receive a tax deduction when you make contributions, but your money will grow tax-free and can be withdrawn tax-free during retirement. (That's assuming you follow a few Roth IRA rules).

The good news for procrastinators is you can contribute to a Roth IRA when you are filing your taxes for the previous year. The sooner the contribution is made, the further into the future, your potential investment earnings will be sheltered from taxation.

For 2020, if you are married and filing jointly, each spouse can make a full $6,000 Roth IRA contribution if they have an AGI (adjusted gross income) of less than $196,000. For singles, that number is a bit lower at $124,000. Contribution limits drop if you earn more than these amounts, and you can't contribute at all if you are lucky enough to make more than $206,000 as a married couple and $139,000 as a single individual. Notice, there is a marriage penalty in play here. I'm just saying.

If your income is close to the threshold limits above, consider saving the $6,000 throughout the year into a regular investment account. Then, take those funds and put the maximum you are allowed into the Roth IRA when filing taxes. I find it is often easier to come up with money over a year's time versus scrapping together a large lump sum at tax time.

Like a fine wine, Roth IRAs get better with age.

There are two ways a Roth IRA gets better as you age. First, there is an allowable catch-up contribution of $1,000, per year, for those who have reached 50 years oldbringing the total contribution to $7,000 per year. On the other hand, the longer you hold a Roth, the more valuable the tax-free growth may become.

A Spousal ROTH IRA can help you become a ROTH IRA Millionaire faster and easier.

Roth IRA for Spouses

Even if your spouse doesn't work, you may still be able to open a Spousal Roth IRA. Whether your life partner is a stay-at-home parent or just between jobs, a spousal contribution will allow your household to contribute to the non-earning spouse. This, of course, assumes you qualify for contributions based on the aforementioned income limits.

Ignore This Benefit: Easy Access to Money

For those of you who are just getting started, tying up money until you retire may scare the crap out of you. What happens if you have an emergency or need money? Roth IRA owners can withdraw their contributions after they have been in the account for five years, for any reason, without owing taxes or penalties. I mention this as a nice, friendly kick in the butt to make sure you get started saving. There is no excuse not to plan for the future. I say to ignore it because if you use this account as a piggy bank, you will likely never accumulate enough wealth to achieve financial independence, let alone maintain a basic standard of living in retirement. Bottom line you can touch the money, BUT DON'T.

To have full access to your "tax-free withdrawal," you need to fulfill the five-year rule. This rule means you can't withdraw your earnings, tax-free, without owing taxes for at least five years from the beginning of the tax year for which you made your first Roth IRA contribution. This applies even if you are older than 59 .

Of course, you can still pull out all of your contributions at any time. If you've been saving for years, and have a substantial Roth IRA, this rule shouldn't really cause much of an issue. On the other hand, if you are starting late, make sure to work with your CPA and fiduciary financial planner on a smart withdrawal strategy so you can potentially avoid unwanted taxation on your Roth IRA distributions.

Double Tax Benefit for Certain People

No, I'm not talking about some tax loophole for the super-rich. For once, there is a tax benefit exclusively for those in the lower tax brackets. As I mentioned above, you don't get a tax deduction when you contribute to a Roth IRA, but you also don't have to pay taxes when you make withdrawals in retirement. (If you follow the simple Roth IRA rules.) That being said, there is an extra tax bonus for low-income workers who are smart enough to make Roth IRA contributions. This bonus comes in the form of the saver's credit. If, in 2020, you make less than $32,500, single, or $65,000 as a married couple, you can potentially receive a tax credit for 10-50% of your contributions to a Roth IRA. This credit is a dollar for dollar reduction of your taxes owed. For those who don't owe taxes, you can receive the credit as a refund.

Can You Become A Roth IRA Millionaire?

Just for illustration, if you were to contribute $6,000 to a Roth IRA from the age of 22 until the age of 70, how much money do you think you would have? You would have contributed $288,000, which is not a small amount of money. Assuming a 10% annual return, your Roth IRA could potentially be worth $5,761,000. Keep in mind; this money can be withdrawn tax-free. If this isn't motivation to start a Roth IRA today, I don't know what is. The earlier you get starting investing for retirement, the more likely you are to become a ROTH IRA millionaire.

There is no better day than today to get started on the road to financial independence. Reach out to a fiduciary certified financial planner to help develop a plan to make sure you are on track for your various financial goals. Whether you are just starting in the workforce or eying retirement, there is always a way to improve your financial health.

Read more:

What You Need To Know About A Roth IRA Now - Forbes