A Great Retirement Account

When it comes to your retirement, there are dozens of different investment options to choose from. There are pensions, 401K’s, IRA’s, precious metals, savings accounts, cash under your mattress, and real estate to name a few. Regardless of your situation, each investment avenue has their advantages and disadvantages. Today we’re going to learn about the Roth IRA. Enjoy!

What is a Roth IRA?

The Roth IRA account is a “tax-advantaged” account which you individually invest in. This means you can create this account without your employer on most standard brokerage platforms. A Roth IRA is considered tax-advantaged because all the gains you make within the account are untaxed as long as you follow a couple of rules.

Having tax-free investment gains is a great advantage since these accounts could grow to millions of dollars after decades of growth and contributions. The caveat to the Roth IRA is that the money you invest into it will be taxed on the front end. This means you can only invest money which has already been taxed (income tax for example). Think of it this way, money into the account is taxed but money coming out is untaxed.

The Pros and Cons of a Roth IRA

The Pros of the Roth IRA

• Money in the Roth IRA account grows untaxed

• You can withdrawal money you contributed to the account penalty-free as long as the account has existed for 5 years.

• There are no required minimum distributions at any age

• Tax-free withdrawals for heirs if the owner of the account passes away.

• No age limit for Roth IRA account holders or openers

The Cons of the Roth IRA

• You are not allowed to deduct the contributions you made into the account on your tax return (other retirement accounts allow this)

• There are income limits that apply to this account. As of 2024, you may not contribute to a Roth IRA if you make more than $161,000 if filing single or $240,000 if filing jointly.

• You cannot withdrawal earnings penalty free prior to age 59 1/2. You may withdrawal the contributions you made but not the earnings your investments grew by.

• As of 2024, the maximum yearly contribution is $7,000. This is relatively low compared to other retirement accounts.

In Plain English, How Does This Account Work?

You may open up a Roth IRA account at any age. In order to contribute to the account, you need to show you make some type of income on your tax return. If your yearly income is below $161,000 per year, and you are filing as single, you may invest up to $7,000 in the account in year 1. Once the new calendar year starts, you may invest another $7,000. (This maximum contribution grows over time so it will likely go up in future years).

Once you start to contribute to the account, you can invest in bonds, stocks, and most equities listed on stock exchanges. Every year, as long as your income remains below the top threshold, you may contribute as much or little as long as your contributions remain below the maximum amount. When your account reaches five years in age, you may pull out contributions only without any penalty.

Imagine you have a Roth IRA account with $100,000 that is 10 years old. Within that account you contributed $60,000 of your own money and the “gains” of the contributions are $40,000. You may pull out up to that $60,000 amount without any penalties.

As time continues, you remain diligent and contribute money every year. Your account has now grown to $750,000 after 30 years of investment. Once you turn age 59 ½ you may withdraw your entire account without having to pay any taxes on that money.

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