When most people start investing they think of real estate or trading in the stock market. Those are great options, but only if you are experienced and have studied the markets. For beginners, it’s better to go with a ROTH IRA when starting.
What is a Roth IRA?
A Roth IRA is an individual retirement account that holds many different investments in a single portfolio. It was created in 1997 to allow tax-free money at retirement. Individuals can leverage a Roth IRA to invest in stocks, bonds, bank savings, and more.
When looking into ROTH IRAs, we would recommend using a company like Vanguard. They have low fees and a great track record!
Benefits of a Roth IRA?
A Roth IRA is an individual retirement account with many benefits. As you create your retirement portfolio, it’s essential to diversify your investments, and this is one way to do that. A Roth IRA gives you the freedom to leverage both it and a 401K to store up retirement assets. It also allows you to take disbursements tax and penalty-free after you meet specific IRS requirements at retirement. Because you pay income tax on this investment before it goes into the account, it’s an excellent way to save if you expect higher income in the future.
Additionally, Roth IRA investments can be passed down to your heirs if all the funds haven’t been used by then. If you don’t need the funds, you won’t be subject to RMD’s, which are required minimum distributions like other retirement accounts. Once you turn 70.5, you can continue making contributions to your Roth IRA, which will only increase your retirement savings when you need it.
Who is Eligible?
You can put money in a Roth IRA at any age as long as you earned an income at some point in your life. You cannot contribute more to these investments than you have made, and there are income and annual contribution limitations. If your MAGI, short for modified adjusted gross income, goes above $193,000 for couples who are married filing jointly, your allowable yearly contributions will be reduced. At $204,000 in income, you won’t be able to contribute any more funds to the Roth IRA. These income limits are reduced for other tax situations.
What are the Similarities and Differences?
There are two different types of IRA’s, a Roth IRA and a traditional IRA. Some of the key differences are explained below:
- RMD’s. Traditional IRAs are subject to required minimum distributions that start at 70.5 years old, unlike the Roth IRA, which has no RMD’s.
- You can still contribute retirement funds to a traditional IRA no matter what your income level. A Roth IRA has income restrictions.
- Distributions from a Roth IRA are tax-free after you turn 59.5, but they are taxed from a traditional IRA.
- The annual contributions for both IRA’s are the same.
What are the Disadvantages of a Roth IRA?
While there are many great benefits to this type of retirement account, there are some downsides. 401K plans allow you to take loans against the balance, but if you invest in a Roth IRA portfolio and need a loan from it, you’re out of luck, You won’t want to take early disbursements unless you are ready to incur a 10% penalty before you turn 59.5.
All in all, a Roth IRA is an excellent opportunity to invest money and get tax-free disbursements at retirement. As you look to develop your retirement portfolio, find a qualified professional to help you make the best investment choices for your long-term goals.