7 Reasons Why You Should Open a Roth IRA
First off what the hell is a Roth IRA?
A Roth IRA is a retirement savings account that allows your money to grow tax-free. You don’t get any tax deductions on your contributions because it’s funded by after-tax dollars. If you wanted tax deduction on an individual retirement plan you can open up a traditional IRA. So “Roth” pretty much means after tax. The IRS limits your Roth IRA contributions to only $5,500 a year because the government wants to tax you in retirement. Meanwhile, 401k contribution limits are $18,000 for 2016. If you were wondering, yes you can contribute to a Roth IRA plan and 401k plan at the same time. The difference is a Roth IRA is individual based and 401k is employee sponsored. Roth IRAs just offer more freedom to choose different types of investments and grows tax-free. The income earning limits on Roth IRAs are $131,000 a year. So if you make more than that I’m sorry you don’t qualify for this retirement account but you can research a backdoor-IRA.
Here are several reasons why you should open up a Roth IRA.
7. First time home buyer withdrawal
You can withdraw up to $10,000 penalty free and use it towards the purchase of your 1st home. You can also do this with 401k plans.
6. Generational benefits
You can pass down your Roth IRA fund to your children and grandchildren. The IRS won’t be able to tax you for this either, so you can create generational wealth for your heirs.
5. The Roth IRA has no required minimum distributions
Unlike 401ks, Roth IRAs do not have an age limit where you’re required to make distributions of your money. You can start withdrawing your money at 90 years old if you wanted to. Plus If you’re still working at age 90, you can still contribute to the Roth IRA.
4. You can withdraw your contributions penalty free
At any time you may withdraw your Roth IRA contributions penalty free. You would only have to pay tax on the earnings of your investments if you decide to make a distribution before 59 1/2 years of age and if your account wasn’t open for more than 5 years. So if I contributed $1000 to my Roth and it earned $50 that year, I could withdraw $1000 penalty free.
3. More investing options
Roth IRAs have an abundance of options and investments to choose from. This retirement savings vehicle allows you to invest in ETFs, mutual funds, stocks, options, index funds, bonds and more. Traditional 401k plans are limited to the specific company’s investment options.
2. Tax advantages
Your money goes in after-tax so it grows tax-free. You fund your Roth IRA with net income (income after taxes) so it can be withdrawn tax-free. You don’t have to pay any tax on your earnings after the age 59 1/2. Which is the current retirement age for these accounts.
1. Investing for the future
The fact that you’re even investing for your future is a bonus already in today’s economy. This is the number one reason why you should open up a Roth IRA account. It will teach you great habits of saving and investing that can lead to a path of financial success. The earlier you start, the more time you will have for your investments to compound and grow.
Related: How I Started Investing