You may want to consider Roth IRAs if you wish to add to your 401(k) or don’t have a 401(k) and need an alternative way to save for retirement. We’ll talk about Roth IRAs, how they differ from other retirement accounts, and how you can decide if you want one.
What is an IRA Roth?
In a Roth IRA, you can invest money that has already been taxed. Your money grows over time, thanks to the money you put in and the returns. When you retire, you can start taking money out of your account.
Unlike a 401(k), you open an IRA account independently, whether it’s a Roth or traditional IRA. It has nothing to do with a company. The way the government taxes a Roth IRA is what makes it different.
Contributing to a traditional 401(k), you do so before taxes are taken out. With a traditional IRA, you pay taxes on your money, but you can usually deduct it. When you take money out of either of these plans, you’ll have to pay taxes on the money you put in and the money you made.
But with a Roth IRA, you invest money after you’ve already paid taxes on it, and the investment isn’t tax deductible. So, when you turn 59 and a half, the Roth IRA rules let you take out everything tax-free, including your contributions and earnings.
8 Good Things About a Roth IRA
There are many reasons to open a Roth IRA, such as:
1. No Taxes on Withdrawals
It’s a way to make money in retirement without paying taxes.
Since you pay taxes now, a Roth IRA is a good choice if you expect to accumulate more wealth. In the future, you are likely to be in a lower tax bracket than you are now. Nevertheless, retirees often live on fixed incomes, so avoiding taxes could be beneficial.
2. You can take money out of your Roth IRA at any time.
When you withdraw Roth IRA money, it is tax-free since it has already been taxed. But if you take money out of your earnings before you’re 59 and 12, you’ll have to pay income tax and a 10% penalty.
3. You don’t have to withdraw money.
Once you turn 72, you must take a certain amount from a traditional IRA or 401(k). This is known as an RMD or required minimum distribution. How much you take out depends on your age, how long you expect to live, and how much you have in your account. Your Roth IRA will never require you to withdraw funds. While you’re still alive, you don’t have to take RMDs from a Roth IRA, but your beneficiary may have to do so after you die.
Under the rules of the CARES Act, all RMDs were put on hold for 2020.
4. People who don’t have a 401(k) can use it (k)
To put money into a Roth or traditional IRA, you need to have earned income, like a salary, hourly wages, bonuses, tips, or money from your business. But because you can open an IRA on your own, it’s an excellent way to save for retirement if you’re self-employed or your employer doesn’t offer a retirement plan. You can also use it to add to your employer’s plan.
If you have a 401(k) and want to invest taxed money, ask your employer if they offer a Roth 401. (k). You can also put money into these accounts with money you’ve already paid taxes on, and you can take that money out tax-free when you retire.
5. You can use a Roth IRA to buy your first home.
If you’ve had your Roth IRA for at least five years, you can take out up to $10,000 in earnings (or $20,000 if you’re married) without a penalty to help pay for your first home. The IRS usually counts you as a first-time homebuyer if you haven’t owned a home in the last two years, but the $10,000 limit is for your whole life.
6. College Expenses
You may use the money to pay for college or other higher education for yourself, your child, or your spouse will not result in a penalty. The money you make will still have to be taxed. The money you make will still have to be taxed.
7. It’s a kind of safety net.
You might be able to use money from your Roth IRA in 2020 to pay for medical bills that cost more than 7.5% of your adjusted gross income or to pay your health insurance premiums if you’ve been collecting unemployment benefits for more than 12 weeks in a row.
You can also use the money from your Roth IRA to help pay your bills if you become permanently disabled.
8. There is no maximum age.
With a traditional IRA, you can’t put money into it after you turn 72, but you can put money into a Roth IRA at any age.
4 Bad Things About a Roth IRA
There are many good things about opening a Roth IRA but also some bad things to think about. Here are some more.
1. You don’t get a tax break right away.
A Roth IRA doesn’t reduce your taxable income like a traditional IRA, so you are paying more taxes now. Tax breaks are available when you reach retirement age.
2. Yearly Maximum Amount
If you are under 50, you can only put in $6,000 a year.
The most you can put into a Roth IRA in 2021, whether it’s a Roth, a traditional, or both, is $6,000. If you choose both a traditional and a Roth IRA, the most you can put into both is $6,000. The decision to split the money between the two accounts is yours. If you are 50 or older, that limit goes up to $7,000, which means you can put more money into your retirement fund.
3. High-earners are disqualified from opening a Roth Ira
You can’t put money into a Roth IRA if your income is too high.
Every year, the IRS makes changes to the income requirements. For the tax year 2021, a single person who files taxes must make less than $125,000 a year to contribute the full amount. After that, the amount you can give goes down. You can’t put money into a Roth IRA if you make more than $140,000 a year.
A married couple filing jointly cannot earn more than $198,000. You can’t make any contributions if it is more than $208,000.
You must set it up yourself.
4. You Have to Sign Up
Unlike a 401(k), which your employer sets up for you, a Roth IRA is an account you open yourself. This means you have to decide what to invest in on your own or with the help of a financial adviser.
How to Sign Up for a Roth IRA
If you want to open a Roth IRA, you need to choose a provider first. There are fees/commissions and account minimums. Providers with account minimums are harder for new savers who don’t have a lump sum to put in their IRA to use. Once you’ve decided on a provider, opening an account online is easy. Be ready to tell them about your date of birth and Social Security number. Then you’ll have to decide where and how you want to put your money to work.
You have many different options to invest in, like stocks and bonds; you can also invest in mutual funds, ETFs, CDs, and money market accounts.
If you’re an intelligent investor, you can take care of your own IRA and decide where your money goes. But if you don’t know what you’re doing, you can choose a Robo-advisor to help you invest your money. Most fees cost between 0.25 and 0.5 percent of your account balance.
How your Robo-advisor invests your money will depend significantly on how old you are and how willing you are to take risks. A Robo-advisor will generally invest in stocks with more risk for younger customers and less risk for those getting close to retirement age.
After you’ve put your money in, keep putting more in. Whenever you can, put in as much as you can each year. Your investments will sometimes make you money and sometimes lose you money. If you keep the account for a long time, your money will grow into a nice nest egg.