Updated: Apr 19, 2021
There are a lot of different types of retirement accounts out there. Which makes this conversation all the more necessary.
A Roth IRA (Individual Retirement Account) is a relatively new type of retirement account that 's designed for you to be able to put post taxed dollars away for retirement. This differs from your traditional IRA or 401k, in which you contribute pre-taxed dollars for retirement. Let's discuss 5 reasons why you should open up a Roth IRA today.
1. Your Retirement Withdrawals Won't Be Taxed
I get it. Everyone wants a 401K today because you can lower your tax liability today. But also understand this: We are living in a time that our federal income tax rates are relatively low. This may not be the case when you retire. Tax law changes all the time!
When you start to withdraw pre-taxed funds from your retirement account, you will have to pay tax on your contributions AND your earnings and you have no idea what that tax rate will be at that time. Don't gamble with you future. Pay the taxes now and fund your Roth IRA with post-taxed (money that has already been taxed) dollars. The best part is...the money that your investments earn in your Roth IRA will never be taxed either.
2. Your Contributions are Yours
Many people don't know this but the contributions that you make into your Roth IRA can be accessed at any time without penalty. If you were to access your funds in any other retirement account before you reach 59 1/2, this would be qualified as an early withdrawal and you will be hit with a penalty.
3. Funds Can Be Used to Purchase Your First Home
This is one of my favorite caveats about Roth IRA's.
Yes, a Roth IRA is designed for saving for retirement. However, funds in this account can be used (penalty free) to purchase your first home. I was fortunate enough to use this option. When I was 16, I start working after school and summer jobs and my parents opened me up a Custodial Roth IRA and we added funds this account and purchased stocks. That money grew over time and I was able to access this money to purchase my first home.
4. Funds Can Be Used to Pay for Your Education
Having access to funds to help pay for college tuition can be a life saver. This is particular nice for kids who start contributing to their Roth IRA as a minor (when your child is a minor, they qualify for a Custodial Roth IRA) who can later access these funds to pay tuition.
5. Your Heirs Can Inherit the Tax Free Withdrawals
Not only will you benefit from tax free withdrawals in your retirement, but your heirs will enjoy the same tax free withdrawals. So if you are prudent, invest diligently and end of living modestly in retirement, you may have a nice size inheritance to leave behind.
There are limitations on how much can be contributed each year into an account as well as some limitations on who can have a Roth IRA and contribute.
Roth IRA annual contributions are maxed at $6,000 per year or $7,000 per year if you are over the age of 50.
This convenient chart from Fidelity outlines the income limitations to determine who can contribute to a Roth IRA.
Can Kids Have a Roth IRA?
Yes! If you have a minor who is working, please open them a Custodial Roth IRA. The amount that you can contribute will be limited to the amount that the child makes in that year but cannot exceed the 2021 $6,000 contribution limit.
If you want your kids to learn more about Custodial accounts and saving for retirement, grab the Decoded: Invest Young Framework here. This framework will teach your kid how to invest, the benefits of starting to invest young and how to grow your Roth IRA to over $1M.
How Much Do You Need to Retire?
Here is a great online calculator from Charles Schwab to help you estimate how much money you will need to retire. You can input how much you currently contribute, when you plan to retire, how much money you think you'll need along with some other variables and the calculator will let you know if you are on track. If you aren't on track, it offers suggestions on what you can change to get on track. It's super helpful!
If you have any questions, feel free to contact me via email at firstname.lastname@example.org