“Start a Roth IRA!” This was the first investing advice I received after college. But what is this thing called a Roth IRA, and what sets it apart? Let’s discuss in plain English.
What is a Roth IRA?
A Roth IRA is a type of account that an individual puts money into, primarily to save for retirement. It can be established at virtually every financial institution, and can have a wide array of investments inside the account, such as stocks, bonds, and mutual funds. It’s important to note that the IRA, itself, is not the investment –it’s what is inside that’s more important.
Think of it like a bucket for investments.
If a Roth IRA is like a bucket, what should I put inside of it?
Since a Roth IRA is a long-term account, it is common to invest more aggressively, such as in stocks or growth securities. Although such investments have more ups and downs in the short-term, they tend to offer more growth potential in the long- run. However, investment strategies differ based on each person’s particular age, goals, and position in life.
What are the nuts and bolts of a Roth IRA?
1. You can contribute up to $5,500 per year if you’re under 50, and $6,500 per year if you’re over 50.
2. There are income limits that change every year. This means you can only contribute the full amount if your modified adjusted gross income is below a certain threshold. For 2014, this is $181,000 for married couples filing jointly, or $114,000 if you are single.
3. Single individuals can only contribute if they have earned income. Only one spouse needs to have earned income for couples filing jointly.
4. Although there are some exceptions for withdrawing funds early, you cannot withdraw earnings without penalty until you are 59 ½. Typically, you should only contribute to a Roth IRA if you don’t plan on touching the money until you are at least that age.
There are a few more caveats to Roth IRAs for certain circumstances, but those are the basics.
What sets a Roth IRA apart from other investment accounts?
With a Roth IRA, you pay income taxes on the amount you put in before you contribute it. If you don’t touch the money until retirement, you won’t pay taxes on any of the growth in your account! It is nice to enter retirement knowing that you have a bucket of savings that can be taken out tax-free.
This particularly important for younger individuals. Typically, people plan on making more money as they advance in their careers, so they will likely be in a higher tax bracket later in life. With a Roth IRA, you pay the taxes now (when your tax rate is likely lower), and not later (when it is likely higher).
So there you have it. This doesn’t cover every detail about Roth IRAs, but does touch on all the major points. If you have questions, shoot me an email at firstname.lastname@example.org. Cheers!
Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions