Retirement: This Holiday Season, Consider a Roth IRA

As you make your Christmas gift budget for the kids, your spouse or your mail carrier (which, by the way, is legally limited to a cash value of no more than $20), consider giving yourself a Roth IRA.

If Google search volume is any indication, Christmastime begins high season to shop online for this unique individual retirement account. A NerdWallet analysis shows searches for “Roth IRA” peak into the new year, then crest again closer to April. Why? Government rulesmay play Scrooge with your postal worker, but the IRS allows Roth IRA contributions for the 2016 tax year until the tax filing deadline (April 18, 2017).

The year’s end is a natural time for those who already have a Roth IRA — and that describes more than 1 in 4 retirement savers, according to a 2015 study — to examine their budget and see how much more they can contribute toward the $5,500 annual limit ($6,500 if 50 or older).

This extra time to make contributions is a gift. A Roth IRA calculator can help unwrap that present.

Put a few personal details such as age, income and existing Roth IRA balance, if any, into the calculator to see how much those contributions could be worth by retirement. Pay particular attention to the tax savings — because that’s one thing that makes a Roth IRAspecial. Because you pay taxes upfront on a Roth IRA, your contributions do not reduce the amount of taxes you pay now, but withdrawals are tax-free.

For example, if a 35-year-old married woman earning $80,000 a year invests the full $5,500 limit until she retires at 67, she could have $518,000 in retirement savings, assuming a 6% annual return. But unlike a traditional IRA, all those post-retirement withdrawals are tax-free. That tax savings will be more than $130,000.

Like all investment products, the sooner your cash is invested, the greater the benefits of compounding. If, for example, a 25-year-old single woman earning $60,000 a year made full Roth IRA contributions each year, she could have $1 million saved by retirement at age 67, with a tax savings of nearly $340,000.

Keep in mind that the government sets income limits for a Roth IRA . The amount you can contribute begins to be reduced at $117,000 in income for single taxpayers and at $184,000 for married couples who file jointly.

To be sure, a Roth IRA does not a retirement plan make — experts recommend saving 15% of your income for retirement, and the Roth’s maximum contribution of $5,500 a year isn’t enough for most earners to meet that goal. However, there’s no limit on how much you can roll to a Roth from another retirement account, although the rollover is subject to state and federal taxes.

And depending on your situation, you may want to prioritize saving in other arenas: If you have a 401(k) that offers matching dollars and you’re not contributing enough to earn them all, for example, that’s where you should begin. And learn about the differences between a Roth and traditional IRA to better understand whether a Roth IRA is right for you.

If it is, the cash you put toward a Roth IRA today will be a present you’ll enjoy every time you withdraw it in retirement.

Kevin Voigt is a staff writer at NerdWallet, a personal finance website. Email: kevin@nerdwallet.com. Twitter: @kevinvoigt.

The article Retirement: This Holiday Season, Consider a Roth IRA originally appeared on NerdWallet.