Someone explain a Roth IRA
What’s a Roth IRA, someone help. thank yewwwwww. Simply put a Roth IRA is an investment vehicle. People use vehicle as a way to describe it is a WAY to invest, it is not an actual investment. I heard a great way to describe it as a Roth IRA is like a shopping cart, it’s a container, but the stocks/investments are the products you buy in the store. That’s exaclty right, and the shopping carts can look different based on you and your needs, like a small cart, or a large basic cart, or maybe one of the carts that holds kids and looks like a racecar.
A Roth IRA allows you to pay the tax now, instead of later. The Wealthy Accountant was a guest on the FI podcast a while back and the episode was such a great way to wrap your head around reasonable and realistic expectations for taxes. You will pay them, so first, accept that. Taxes are not bad. They afford our country the ability to keep going, things are expensive, just like things in our own lives are expensive, we can’t exist on no income. Now, disagreeing with ways that money is spent, that’s fair, but basic needs like roads, schools, those things should be something funded by the people who benefit from them, which we all do.
Currently you can contribute 7,000 a year to a Roth IRA per person, so that actually means anyone with earned income can contribute in your family. If you’re contributing the max, it’s 583.33 a month. and if you’re 30 years old starting with literally nothing and you just contribute to the Roth IRA from 30-62 at an 8% return, you’ll have over 1 million dollars. $1,014,654 to be exact. And that’s just for you, if your partner does the same thing, you two have 2.2 million in retirement. Based on the 4% withdraw rule, which, has some downfalls which is discussed beautifully on this podcast, you’d be able to take out 80K per year.
A Roth IRA (Individual Retirement Account) is a type of retirement savings account that offers tax advantages to encourage individuals to save for retirement. Here’s how it generally works:
1. **Contributions**: You can contribute money to a Roth IRA with after-tax dollars, meaning you've already paid taxes on the money you put in. There are annual contribution limits set by the IRS, which can vary year to year.
2. **Tax Benefits**: The primary benefit of a Roth IRA is that qualified withdrawals in retirement are tax-free. This means you won’t owe income taxes on the money you withdraw, including any investment gains you've earned over time. This is different from a Traditional IRA, where contributions may be tax-deductible but withdrawals are taxed as ordinary income.
3. **Investment Options**: Funds in a Roth IRA can typically be invested in various financial products such as stocks, bonds, mutual funds, ETFs, and other assets, depending on the provider you choose.
4. **Withdrawals**: You can withdraw your contributions (but not your earnings) at any time without penalty, since you've already paid taxes on those contributions. However, to withdraw earnings tax-free and penalty-free, you generally need to be at least 59½ years old and the Roth IRA account must have been open for at least five years.
5. **Income Limits**: There are income limits for contributing to a Roth IRA. If you earn above a certain threshold, your contribution limit may be reduced or eliminated. These limits are set by the IRS and can change annually. Currently the limit in 2024, your MAGI (modified adjusted gross income) has to be under $146,000 for single filers or under $230,000 for joint filers to make the full Roth IRA contribution.
6. **No Required Minimum Distributions (RMDs)**: Unlike Traditional IRAs and 401(k)s, Roth IRAs do not require you to start taking withdrawals at a certain age (currently 72 for Traditional IRAs). You can leave the money in your Roth IRA to grow tax-free for as long as you like.
Overall, a Roth IRA can be a powerful tool for retirement savings, especially if you expect your tax rate to be higher in retirement or if you want to diversify your tax exposure (since withdrawals are tax-free). It’s important to consider your individual financial situation and retirement goals when deciding if a Roth IRA is right for you.