Retirement doesn't necessarily mean living on a shoestring budget. Having adequate savings allows you to maintain your desired standard of living without relying solely on Social Security or family support.
One strategy for retirement saving is with a Roth Individual Retirement Account (Roth IRA). A Roth IRA is a special type of retirement account that offers unique tax advantages compared to traditional IRAs.
Why Open A Roth IRA
Think of a Roth IRA like your magic carpet to financial freedom. It's a way to stash money away for later in life that can help you retire a millionaire.
Here are several reasons to consider a Roth IRA:
Tax-free growth and Withdrawals
This is the biggest perk of a Roth IRA. Unlike traditional IRAs, where you get a tax deduction upfront but pay taxes on withdrawals in retirement, your contributions to a Roth IRA are taxed upfront, but then your money grows tax-free and you can withdraw it tax-free in retirement. That's the superpower of a Roth IRA, it's like tax-free magic.
Diverse Investment Options
Your Roth IRA isn't a high-yield savings account; it's more like a treasure chest. Roth IRAs allow you to invest in a wide range of assets such as stocks, bonds, mutual funds, and real estate. This flexibility enables you to tailor your investment strategy to your risk tolerance and financial goals, potentially leading to higher returns over time.
It's your chance to go on investing adventures and potentially watch your money grow over time instead of just letting your money sit alone in your account. Making smart moves with your cash while it’s stashed in your Roth IRA means you’ll keep up with inflation and preserve your wealth.
The Power of Compounding
The earlier you start, the longer your money has to grow through compounding. Even small contributions early on can snowball into a significant sum thanks to compound interest.
The value of a Roth IRA has the potential to grow over time through compounding.
Whenever investments generate interest or dividends, these earnings are added to the account balance. Account owners have the opportunity to earn interest on the additional interest and dividends, creating a cycle that can repeat itself continually.
Roth IRA Example
Here's an example of how a Roth IRA can grow over time based on an individual's contributions:
- Lisa, age 35, plans to retire in the next 30 years and wants to maximize her retirement savings. She contributes $7,000 per year to her Roth IRA through her employer earning an annual interest rate of 7%.
- Each time Lisa earns this 7% interest, it gets added to her account balance and continues to compound over time. When Lisa retires in 30 years, she can expect to have approximately $661,226, even though she only contributed $210,000 of her earnings.
- This means Lisa accrued an additional $451,226 through compounding interest.
But wait…Here's an example if Lisa had started contributing to a Roth IRA at the age of 25:
- Starting at age 25 with a $7,000 contribution annually and earning 7% annual return, her nest egg would grow to approximately $1,397,446 by retirement. That means Lisa's total contribution was $280,000 and the rest is compounding interest!
What's great about Roth IRAs you can contribute as long as you have earned income and meet the eligibility criteria.
Flexibility and early access
Unlike traditional IRAs with required minimum distributions (RMDs) starting at age 72, you can leave your money in a Roth IRA indefinitely and avoid RMDs. When you decide to take the money out, you won't have to pay taxes on the gains. It's like keeping all the loot for yourself!
But there's more.
Since there are no age restrictions, you can continue contributing to a Roth IRA as long as you have earned income. This can be particularly beneficial if you plan to work past the traditional retirement age and want to continue building your retirement savings.
Early withdrawal option
With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits).
Potential estate tax benefits
It's worth noting that qualified Roth IRA distributions are generally not subject to estate taxes. This can be a way to pass on wealth to your heirs more tax-efficiently.
Good for younger individuals
Since the tax benefits of a Roth IRA shine brighter when compounded over a longer period, it's particularly advantageous for younger individuals who have more time for their contributions to grow tax-free.
You can start making money moves now by contributing to a Roth IRA. Whether it's from your side hustle, employment, or small business, you can throw some cash into a Roth IRA to let it work its magic.
The best part? There's no rush to cash in because the government doesn't force you to take out your money at a certain age. You can let it grow and wait until you're ready to unleash your financial windfall.
2024 Roth IRA Contribution Limits
The maximum you can contribute in 2024 is $7,000 for individuals under 50 and $8,000 for those 50 or older (catch-up contribution). Higher income earners may face limitations on contributions.
How to open an Roth IRA
Step 1: Compare your options
Most banks and brokerage firms offer Roth IRA accounts. Decide whether you want to manage your investment portfolio on your own through an online broker or you want assistance via a robo-advisor or human advisor.
Step 2: Open an account
Once you've settled on a bank or brokerage firm, complete the application process with the provider. You'll typically need to give basic details about yourself, including your name, address, date of birth, Social Security number, contact information, and employment details. You may also need to provide some documentation to prove your identity.
Step 3: Fund your account
Your IRA provider will give you instructions on how to fund your account, typically via a bank transfer, IRA balance transfer, an account with another firm, or from a 401(k) rollover. Once your account is funded, you can open your portfolio and set up regular contributions going forward.
Online brokerage firms that offer Roth IRAs
Acorns offers a Roth IRA account by opening the Acorns Later account with a minimum $5 deposit. Acorns will guide your retirement saving with their easy IRA investing options, featuring SEP, Traditional, and Roth plans.APPLY NOW
A $10 initial deposit is required to open an M1 Finance Investing account. Once you open the M1 Finance account, you can open and contribute to multiple types of IRAs with a $500 minimum initial deposit.APPLY NOW
Axos Investing requires a $500 minimum to open a Roth IRA that is managed portfolio or $50 minimum for a self-directed Roth IRA.APPLY NOW
So, a Roth IRA is your financial sidekick, helping you build wealth, grow your money, and be the captain of your own financial journey. It's all about setting yourself up for a blockbuster retirement and enjoying the benefits of your financial power! It's worth noting that there are income limits for contributing to a Roth IRA.
If your income exceeds certain thresholds, you may be limited in the amount you can contribute or may not be eligible to contribute directly to a Roth IRA.
As with any financial decisions, always consult a certified financial planner or a tax professional for the best advice.