Investing in a Roth IRA
Retirement is a scary thought; however, there are plenty of options to assist you as you begin to transition from a working professional to a full-time retiree. Out of all the retirement savings opportunities, there is one retirement account that truly defines financial independence. No, this is not some simple brokerage account. In fact, this is the most powerful financial retirement account any one can immediately create, which will increase their net-worth year after year.
What if I told you in about 10 minutes you will be an expert on Roth IRA’s? Better yet, what if I told you your Roth IRA can exceed $1,000,000 by the time you are eligible for retirement? Well you are in luck, because today we are going to discuss what a Roth IRA truly is, how this advantageous retirement account works (laws and regulations), and why you need to create a Roth IRA immediately to propel and compound your net-worth yearly. Trust me, stick with us. You do not want to miss this valuable information, because it has the potential to set you up for a beautiful retirement.
What is a Roth IRA?
In plain and simple terms, a Roth IRA is an individual retirement savings account that taxes your contribution (money) up front. This tax up-front structure is what makes it advantageous for investors like you and me. Since your account is funded with after-tax money, the investment gains you accrue from your Index Funds, Mutual Funds, or Individual Stocks are tax-exempt once you are eligible for withdrawal. This opportunity allows your Roth IRA to compound your gains every year completely tax-free.
Created by Senator William Roth (Taxpayer Relief Act of 1997), it encourages you to save money for retirement by offering multiple tax advantages. However, there are some limitations which we will discuss, but remember a Roth IRA is an individual retirement account that taxes your contributions immediately. So the money you put into it each year is immediately taxed.
How does a Roth IRA (Individual Retirement Account) Work?
A Roth IRA acts just like a brokerage account, a simple retirement savings account, or a Traditional IRA; however, the only difference lies between how these accounts are taxed. As an investor, you have the flexibility to own what ever type of investment or asset you want in your Roth IRA: Exchange-Traded Fund’s (ETF’s), Individual Stocks, Bonds, Mutual Funds, or even Real Estate.
Although a Roth IRA is hands down the best retirement account to create and own, it comes with some strict rules and regulations which we will now breakdown.
Who is eligible to open a Roth IRA?
Anyone is eligible to open a Roth IRA if they have earned income. Even after the age of 70 ½, you can still contribute to your Roth IRA if you still have earned income. Earned income is classified as any wages, tips, or salaries you earn from your standard job. Even if you are self-employed, you can still contribute to a Roth IRA since you are ‘earning income.’
It is important to note that you can only contribute up to the amount of your earned income not to exceed $6,000 per year. What do I mean by this? Let’s say you work a part-time job and throughout the year you earn $1,500. As the proud owner of a Roth IRA you can only contribute up to $3,000, since your contribution is not allowed to exceed your earned income. Or if you are a student in college and make $12,000 a year then you are eligible to contribute the full $6,000 to your Roth IRA.
Remember, your Roth IRA contributions cannot exceed your earned income.
How Much am I able to contribute to my Roth IRA (in 2019)?
As of 2019, you can contribute up to $6,000 per year in your Roth IRA, or $7,000 if you are over the age of 50.
What are the Best Investments for your Roth IRA?
There is no single best investment for your Roth IRA, but I urge you to diversify your portfolio. Remember, investing in your Roth IRA is just like investing in your Brokerage account. If you have not read our article on Dollar Cost Averaging, I highly encourage you to do so. It is hands down the best investment strategy, as it is simple to maintain and frees you from the nuances of managing your portfolio.
As a prudent Roth IRA investor, you have the option to invest in individual stocks, mutual funds, index funds, or even real estate in some unique cases. But, since we like to keep it easy, I highly encourage you to invest in mutual funds or index funds. For the most part, these investments are professionally managed by a team, and are diversified across multiple holdings, which mitigates your overall risk. Also, Mutual Funds and Index Funds tend to have low entry barriers, which is great for a Broke-Millionaire. They do not require you to invest a certain amount! Heck, some allow you to start investing with as little as $50-$100, so there is no excuse for you to not open up your Roth IRA today or tomorrow.
Dollar Cost Averaging in a Roth IRA
Since you can only allocate $6,000 or $7,000 throughout on fiscal year, I personally deposit $6,000 immediately, but leave it in my settlement fund within my Roth IRA. What does this mean? I max out my yearly contribution immediately, but I do not use it all towards a specific stock, mutual fund, or index fund. Instead, each month it automatically takes $500 from my settlement fund and invests it across my portfolio positions in equal allocations.
This example is what happens every month in my Roth IRA. Vanguard will take my $500 and will invest it evenly into:
Again, this is just what I invest in. It is simple, diverse, and continues to compound yearly. Remember, if you have any doubt, seek a Certified Financial Planner or a licensed professional for further information. Their expertise will guide you in the right direction.
Are there any Income Restrictions for Roth IRA Owners?
Of course, the Government had to place specific income restrictions on certain individuals, otherwise this would be a tax haven for those who make a ton of money from their occupations. My apologies to our readers who are lawyers, business owners, doctors, or other income rich professionals, but this may not be the best retirement account for you, since you most likely exceed the required income parameters.
Here are the income restrictions if you are single, married filing jointly, Married filing separately or filling as a widow(er).
Again, a Roth IRA is a beneficial retirement savings account, but it is not available for everyone. If your income exceeds the limits, then you should consider a Traditional IRA. Like a Roth IRA, a Traditional IRA has eligibility requirements. Make sure to check with your financial institution about available retirement saving opportunities or consult with a licensed professional.
Spousal Roth IRA?
If you are a proud stay home mom or dad, then do not worry! We all know the struggles of parenting. Luckily, you and your spouse are still able to contribute to two separate Roth IRA’s; however, the income restrictions still apply. But if you are fortunate enough to fall within the income-eligibility parameters, then you both can contribute up to $6,000 to your separate Roth IRA’s, if your earned income exceeds $12,000 per year. Remember, you cannot contribute more than your total earned income.
Why You Need a Roth IRA
A Roth IRA is a sure shot way to protect and improve your hard-earned retirement. As we all know, finding a job that offers a pension is hard to come by. If you have one that offers a pension, keep it! But if you are like every other American, then your Roth IRA needs to become your best friend.
Like we said earlier, a Roth IRA is the most powerful retirement savings account, since your withdrawals are tax-free. But that is not what excites me as a proud Roth IRA owner. What excites us here at Broke-Millionaire? The sheer growth that takes place within your Roth IRA over the course of 30-40 years. I am not joking when I say this, but there is no reason for you to not retire a millionaire. If you do not believe me, then use this calculator immediately.
Invest in your Roth IRA as Early As You Can
As you can see, the earlier you start the better off you will be once it finally becomes time to retire. At the moment, I am currently on track to retire with $1,610,000 in my Roth IRA, and this is assuming I average a 6% return on investment annually.
Fortunately, I started maxing out my Roth IRA at the age of 19. Since I started at 19 years old and plan to retire at the age of 65, my total contributions would only be $276,000. The remaining $1,334,000 would be from sheer growth (“Profit”). I know, it is financially astronomical and mind blowing. Do you believe me now, when I say a Roth IRA is the most powerful investment tool?
Am I going to stop contributing any time soon? Absolutely not! In fact, time is both our best friend and enemy. You absolutely need to start investing in your Roth IRA as early as possible. I am not trying to brag to you or scare you, but rather, I want you to experience and understand the reality of TIME.
You will never be able to catch up to the value of my Roth IRA.
But that is totally fine. Just like you, I cannot catch up to my brother who started 3 years before me. The key takeaway here is to start investing in your Roth IRA as EARLY AS YOU CAN. Even starting a year or two early can yield you thousands of dollars extra when you decide to retire.
If you are starting in your late twenties or early thirties, make sure you are disciplined and max out your Roth IRA each year. You need to play catch up, which is not a bad thing. You still have plenty of time to retire with a million dollars in your Roth IRA.
How to Open up a Roth IRA?
By now, you should know what a Roth IRA is, how it works, and why you need one. Opening a Roth IRA could not be easier. Contact your financial institution, and I guarantee you will be a proud Roth IRA owner within 15 minutes. Vanguard, Fidelity, Charles Schwab, Navy Federal, E-Trade, USAA, and nearly every single bank has Roth IRA’s available for their clients. For real, all you have to do is just ask.
To make it even easier, make sure you have your SSN, banking information, annual income, marriage status, and a photo ID nearby when you begin the process. This available information will make opening a Roth IRA 10x easier.
Roth IRA: Your Retirement Matters
I know it is daunting to think about retirement, even when you are only twenty or thirty something years old, but now we know the importance of time. At the end of the day, your retirement matters, and it should. You have worked hard your whole life. You deserve a relaxing retirement, where your time is spent traveling, visiting your family, and spending time with your friends. Why worry about penny pinching when you can enjoy a nice cocktail on the beach? I sure do not want to worry about my finances when I am sixty or seventy years old.
Again, the earlier you start investing in your Roth IRA the more secure your retirement will be. Take ownership over your finances and open a Roth IRA. Join the Broke-Millionaire community to learn the best tips to maximize investments, improve your personal finances, and engage with a community that has similar goals to you.