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Everyone’s been telling you to open up a Roth IRA account, but you feel stuck you have no idea how to move forward or how any of it works and you’re not sure how to begin.
You still believe that keeping your money nice and safe is savings is your best move. Saving is a great start, but savings won’t help you get to financial freedom.
Only keeping your money in savings is like being from Boston and deciding that you’re going to walk to California, instead of booking a flight to get there. The pilot even offered you to get on the plane and you refused and said: “Nah I’m good I’m just going to walk there.”
Investing is what’s going to help you reach financial freedom way quicker than savings ever will. In this post, I’m going to break down what is a Roth IRA and why you need one, like yesterday.
This isn’t me telling you what to do with your money. This is me telling you what I’m doing with my money and you can join in along the way. *Please note I am not an investment adviser. I’m just a woman who’s always been interested in reading finance books and learning how to build wealth.
I decided to write and share what I’ve learned. If you’re really worried about your finances you should go talk to an investment or financial adviser.
What is this Roth IRA you speak of?
A Roth IRA is just one form of an investing vehicle. According to Google, a Roth IRA is an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.
A Roth IRA is different from your employer’s 401k because your employer has nothing to contribute or do with your ROTH IRA. It’s all up to you. The money that you put in after your taxes are taken from your paycheck is what you would use to invest in your ROTH IRA.
You can never have too much retirement money, even if you’re signed up with your companies 401k. A Roth IRA is another great bucket to house your investments.
Remember a Roth IRA isn’t an investment; it’s a place to house your investments. It’s an investment vehicle where you can buy stocks, mutual funds, bonds, real estate or just hold cash if you wanted to. You can mix it up or only own one fund, it’s really up to you.
In my Roth IRA I mostly just stick to a simple stock market index fund. Motif is one place where you can open up an IRA account, but there are many other places to choose from as well.
Why should I have one?
You should try to max out your Roth IRA each year because the more money you put in while you’re young the more money you will have when you’re older due to compound interest.
Think of Compound interest as interest on top of interest or racks on racks on racks. The earlier you start the better, it will take time before you start to see significant progress, but since we are long term investors we have plenty of time.
Do I have to put the maximum amount of $5,500 into my Roth IRA each year?
No, it’s not a requirement that you have to put in $5,500 into your Roth IRA account, but the more money you put in, the more wealth you’ll have in the future. If you can’t put in the full amount figure out how much you can put in. If you can afford to cut back on some of your expenses or pick up a part time job or side hustle to earn more money.
Pulling money out of your Roth IRA before you retire
According to Rothira.com “To withdraw earnings without paying taxes or penalties, you must follow the rules.The first requirement is that the withdrawal must be taken five years or more after the account is open. If you satisfy the time requirement, the IRS says distributions qualify if:
- the money is used to buy, build or rebuild a first home, up to a $10,000 maximum, and is spent within the 120 of the withdrawal
- the money is withdrawn because you suffered a disability
- the money is distributed to your beneficiaries or to your estate after you die”
Is a Roth IRA tax deductible?
The biggest advantage of a ROTH IRA is that you won’t be taxed once you withdraw your money later You won’t receive a tax deduction on the money inside your Roth IRA; however once you retire you will be able to take out your money without paying any taxes on it. Simply put the money in this account is taxed at the beginning.
“The more you put in, the more you end up with in interest and appreciation. Compound interest can practically work miracles.
However, the more you have in principal, the faster the interest grows. As you max out your retirement account, your money will work better on your behalf. Consider that $10,000 appreciating 8% a year for 20 years will be worth over $46,600.” betterment.com
What are the Roth IRA requirements and do I meet them?
According to Rothira.com
- You must have earned income from a salary or from profits from a small business.
- “Single or head of household: you must earn less than $116,000 to fully contribute to a Roth IRA
- Married filing jointly or a qualified widow(er): you must earn less than $183,000 to fully contribute to a Roth IRA
- Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. (Note: Married filing separately can use the limits for single people if they have not lived with their spouse in the past year).
- If you under the age of 50 years old you can contribute $5,500 toward retirement in a Roth IRA. If you are married each individual can set aside $5,500 toward their retirement, even if only one partner works.”
- You have until April 15 of the next year to fund your Roth IRA account. After this date it resets for the next year. For example I have until April 15, 2016 to contribute to my Roth IRA for 2015.
Where can I open up a ROTH IRA account?
Get Rich Slowly.org does a pretty great job at explaining how and where to open up a ROTH IRA account so I won’t re-write what he said. Please read his article here. In short the three places he recommends opening up a Roth IRA is Betterment, Fidelity, T Rowe Price, and Vanguard.
I currently have my Roth IRA with Charles Swab, but I will be switching to Vanguard.
I know that was a lot to take in, but breathe. Compound interest is sexy af and the sooner you start investing the more your money can work for you. Let’s keep it simple.
If you earn less than 116,000 you can open up a Roth IRA today. You don’t have to contribute the maximum amount. If you have to start small. $100 a month, or $200 a month is better than $0 a month. Remember investing your money is going to help you reach your money goals a lot faster than simply keeping your money in a savings account.
There are a ton of different places you can open up your Roth IRA account.
Not ready to start investing? Cool, grab your free money goals and credit card tracker workbook here.