Roth IRA explained, and the 4 biggest benefits
Roth IRA explained, and the 4 biggest benefits
A Roth IRA is one of the best options available when it comes to retirement savings. Thanks to their unique tax-free features, Roth IRAs can help you build a more secure retirement nest egg.
If you’re like most women, saving for retirement is probably one of your top financial priorities. And if you’re looking for the best way to do so, you may have come across the term “Roth IRA.” But what exactly is a Roth IRA? And why should you open one? Here’s everything you need to know about this important retirement savings tool.
What is a Roth IRA?
An individual retirement account (IRA) is a savings account that offers tax benefits to encourage people to save for retirement. The Roth IRA is named after Senator William Roth, who helped create the legislation that allows people to contribute money to these accounts.
What are the benefits of a Roth IRA?
Here are the four biggest benefits of a Roth IRA.
1. You can save more for retirement with a Roth IRA.
One of the biggest benefits of a Roth IRA is that you can contribute more money each year than you can with other types of retirement accounts. This means you can save more for retirement, period.
2. Your money will continue to grow tax-free.
Unlike other types of retirement accounts, the money in your Roth IRA will continue to grow tax-free, no matter how long you leave it invested. This can add up to a lot of extra money over time!
3. You can withdraw your contributions without penalty.
If you need to access your money before retirement, you can do so without penalty by withdrawing your contributions (but not any earnings). This makes Roth IRAs a great option for emergency funds.
4. There’s no required minimum distribution age.
Unlike other types of retirement accounts, there’s no required minimum distribution age for Roth IRAs – meaning you can keep your money invested and growing for as long as you like!
Who can open a Roth IRA?
To be able to use a Roth IRA, you must meet certain qualifications. For example, you must have earned income during the year in order to contribute to a Roth IRA. Additionally, your income cannot exceed certain limits in order to be eligible for a Roth IRA.
The rules for Roth IRAs can be confusing, but here is a brief overview. If you are a single filer, you must earn less than $138,000 to contribute the full amount to your Roth IRA. If you make between $138,000 and $153,000, you can still contribute but it will be a reduced amount.
For married couples filing taxes jointly, if your combined income is less than $218,000 then you qualify to contribute. If your combined income is between $218,000 and $228,000, you can contribute a reduced amount.
You can learn more at the IRS website.
How much money can I put in a Roth IRA?
There is a limit on how much money you can contribute to tax-free accounts. For 2023, Roth IRA contribution caps are set at $6,500 per year. This limit applies no matter how old you are, or how much money you make.
If you exceed these limits, you may be subject to penalties from the IRS. Before opening an account, make sure that your contributions fall within the set limits. Your ultimate goal should be to reach the limit to maximize the benefits of this tax-advantaged account.
How to choose where to open your Roth IRA
There are so many places that offer Roth IRAs, it can be overwhelming trying to find somewhere to open your account. You can open a Roth IRA at a bank, or at a brokerage, or pretty much any financial institution, and with so many options, it’s easy to get overwhelmed and put off opening an account.
The best answer is that you should start one wherever you feel most comfortable.
These decisions are not permanent, and you can always change your mind and roll your account over to a new institution, but the earlier you get started investing, the more your money will grow over time. You can check out Bankrate.com to learn more about your options for opening a Roth IRA to find what’s right for you. Things to consider when making your decision are whether or not there are fees associated with your account, if you gain access to an advisor, or if there is a minimum amount you need to invest.
How does a Roth IRA work? What am I investing in?
Roth IRAs are unique because of their tax benefits, but ultimately they are simply investment accounts. You can think of them as a container that holds investments, with some fun added bonuses that save you money and help it grow more.
Choosing what goes in your Roth IRA is the same process as making any investment, including considering your risk tolerance and financial goals. Since this is money that won’t be accessed until retirement, you’re operating on a long-term investment timeline. Most conventional wisdom will suggest that you invest in low-risk options for your retirement accounts, like Index Funds. There are also many funds that are geared specifically for retirement accounts that allow you to target the specific year you want to retire, and are balanced and changed according to that goal.
You can also allocate some of your funds to stocks in companies you love, or groups of stocks, like ETFs, that align with your values. Do you love your Apple products? You can invest in Apple. Is gender equality important to you? You can invest in something like the Fidelity Women’s Leadership Fund, that “Invests in companies that prioritize and advance women’s leadership and development.”
Financial advisors are great resources when making these decisions, and if you want to read up yourself, check out The Boglehead’s Guide to Investing, a great book for beginners.
How do I make my investments?
Ideally investing in your retirement account should be part of your monthly budgeting plan, and you should allocate a set amount either bi-weekly or monthly to automatically be invested into your account. This is known as dollar-cost averaging.
Dollar-cost averaging is a technique that can be used to minimize the risk of investing in the stock market. With dollar-cost averaging, you invest a fixed amount of money at regular intervals. For example, if you’re paid twice a month, you allocate $200 from each paycheck to go into your retirement account the day after you receive your paychecks.
This technique can help reduce the effects of volatility in the market since you’ll buy more shares when prices are low and fewer shares when prices are high. Over time, this should lower your average purchase price, meaning you’re getting the best bang for your buck on your investment.
These small investments will add up over time and are a smart and easy way to take control of your finances.
Roth IRAs are a great way to invest in your future and can be a valuable part of your overall financial plan. They offer unique tax benefits that can save you money in the long run, and they’re easy to get started with. To get started planning your financial future, download our Free Monthly Budget Worksheet. With a little bit of planning, you can be on your way to securing a comfortable retirement!
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