What is a Roth IRA and would it help you?

A Roth IRA is an individual retirement account that lets you invest and withdraw money. Earnings grow tax-free and you can contribute up to $6,000 ($7,000 if 50 or older). 

Starting a Roth IRA can be a great idea if you want to achieve financial independence. But there’s a lot to unpack when it comes to learning about making the most of one.

Roth IRA rules

A Roth IRA is different from a traditional IRA or a 401(k) in many ways. It has its advantages and disadvantages. Here are some of the defining rules of a Roth IRA.

  1. You pay income taxes on the money you put in into a Roth. Contributions are post-tax and nondeductible.
  2. You can contribute $6,000 per year ($7,000 if you’re 50 or older).
  3. Your 2021 modified adjusted gross income must be less than $140,000 (single filers) or $208,000 (married filing jointly). 
  4. People aged 59½ years or older can take distributions, and earnings, if they’ve held the account for at least 5 years. All withdrawals at this point are tax-free
  5. You don’t have to take any money out or put any money in if you don’t want to.

Can you open a Roth IRA?

It’s likely that you qualify to open a Roth IRA. Here are the requirements:

  • You make less than $140,000 (single filers) or $208,000 (married filing jointly). 
  • You have to have earned income.

Advantages of a Roth IRA

  • Potential tax savings if you expect your tax rate to be higher in the future. (Most people do!)
  • Withdrawals are easy and convenient. If you plan on withdrawing earnings early, then you may be taxed or penalized.
  • You can invest in a Roth IRA and a 401(k).
  • Flexibility allows you to contribute however much you want, whenever you want. The deadline to contribute is the tax deadline.
  • No age minimum means that you can open a Roth IRA as long as you have earned income.
  • No required minimum contributions like a traditional Roth or a 401(k).

Investment options like stocks, bonds, index funds, and more are available to you.

Disadvantages of a Roth IRA

  • You can’t take a loan from an IRA

Early withdrawals (before the age of 59½) of your investment earnings will come with a 10% penalty unless you qualify for an exception.

How to open a Roth IRA

There are so many more advantages than disadvantages to opening a Roth IRA account. Younger people would benefit the most as they’d be saving a lot of money on taxes and would achieve financial independence at an earlier age. Even if you’re not that young, it would still be a wise investment.

You can open a Roth IRA with a bank, robo-advisor, or a traditional broker.

We advise you to stay away from banks as they focus more on saving rather than investing. 

Robo-advisors can automatically invest your money. Out of sight, out of mind. You reap the rewards without putting in too much effort.

Traditional brokers will work with you to select the best investments.

But, do your own research! Opening a Roth IRA is not difficult, and can help you achieve financial independence a lot sooner than you think.

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