WHAT IS A ROTH IRA?
One of the smartest ways that you can start saving for retirement is opening up a Roth IRA. This special retirement account is simple to start, effortlessly efficient because it’s tax-free and will have you wondering why you haven’t started investing in one sooner! Similar to other qualified retirement plan accounts, the money invested within the Roth IRA grows tax-free. But unlike traditional retirement accounts, with a Roth you pay taxes initially when you invest money in your account but withdrawals are tax-free when you cash out after you’re at least 59½ years old. This “pay now, save later” tax feature is beneficial if you expect your tax bracket to rise in the future and remain higher in your retirement years.
If you think Warren Buffet, arguably the greatest investor of all time, has a secret formula for building wealth then guess again. He has been vocal for decades on how compounding works and it is actually quite simple. The main variables to compounding that builds wealth is time, taxes and fees. If you have time (years to invest) and can minimize your taxes and fees then you have what it takes to create substantial worth through the merits of compounding.
A Roth IRA with the help of Intelligent401k is exactly the way to compound your retirement funds to build a nest egg for your retirement and it is SIMPLE. These retirement accounts can appreciate in value by compounding, which can help your money grow substantially. Whenever your investments within your account earn a dividend or appreciate in value, that amount gets tacked onto your account balance. That means your money will continue to grow even if you don’t make regular contributions to the account. This is why it is eminently important to open a Roth IRA sooner rather than later because you’ll be better set for retirement the longer your money has to grow!
THE BENEFITS OF OPENING A ROTH IRA:
Roth IRAs come with some significant advantages compared to most traditional retirement accounts. Here’s what you need to know about the perks of Roth IRAs and how it can give you financial flexibility and help you maximize your retirement savings!
- Tax-Free Retirement Withdrawals: Roth IRAs are funded with after-tax dollars which means you won’t owe Uncle Sam a dime when you cash out in retirement (after age 59 ½).
- Penalty-Free Withdrawals: You can dodge any withdrawal penalty with a Roth as long as the money you withdraw comes from your contributions and not earnings. This offers a breadth of flexibility and peace of mind if you need to access your funds for any reason.
- No Contribution Age Restrictions: You can contribute to a Roth IRA at any age as long as you have a qualifying earned income.
- No Required Minimum Distributions (RMDs): With a traditional IRA, you must start making withdrawals called “required minimum distributions” after you reach a certain age. Alternatively, if your money is invested in a Roth you can leave it untouched for as long as you like, allowing it to continue to gain interest.
- Inherited Roth IRAs Tax Benefits: If you pass your Roth IRA onto your beneficiaries, their withdrawals will also be income tax-free. As long as the account had been open for at least five years at the time the account holder died.
Roth IRAs are a popular retirement account choice for anyone because they are simple to set up through an online broker and if properly and prudently invested can have returns consistent with investing in stocks and bonds. This will fluctuate but the average annual return of the S&P 500 index is 10.7% over the last 30 years *thefool.com. Depending on your income you can currently contribute up to $6000 per year in a Roth IRA and if you don’t have one currently setup we urge you to start today. You should be contributing every single year until you are in your late 50’s to take advantage of these benefits! Let’s say you open a Roth IRA and contribute the maximum amount of $6000 each year for 40 years. Assuming a 10% rate of return, you would amass $2,927,110! That’s the power of compounding. On the other hand, if you decided to put your money in a savings account that didn’t yield interest, you would only have $240,000 after 40 years. That’s a life-altering leap that is too good to pass up.
HOW TO CHOOSE A BROKERAGE:
The world of technology has made setting up a Roth IRA simple and effortless! But how do you decide which brokerage to go through? It’s important to know that not all accounts are created equally. Where you open your Roth IRA can prove to have a big impact on the investments you’re able to access. Also, it’s important to know that the fees you pay for maintaining the account may vary widely. All of the costs associated with maintaining and trading within your account can reduce your overall investment return. Remember, every dollar you pay to fees is a dollar that doesn’t go into your investment account. Some other factors to take into consideration are quality of customer service, online tools and a user-friendly web platform. Some brokerages that we find particularly easy-to-use are Schwab, E-Trade or Fidelity!
HOW TO START A ROTH IRA:
- Decide if you want hands-off or hands-on help: There are a couple of options that you can go through when starting a Roth IRA. You can create an account with an online brokerage where you personally buy and sell investments. Or you can link your account up to an A.I-driven platform that automatically rebalances your portfolio for you, like Intelligent401k. The latter may be beneficial for new investors or people who don’t have time to keep up with market trends and fluctuations. Using an A.I technology can potentially allow you to maximize your savings while helping you shed costly, overpriced management fees.
- Find a Provider: Once you decide what kind of service account you want, you can then start looking for a specific provider to go through. Some things to consider when choosing a brokerage and/or robo-advisor are management fees, trading fees, account minimums and customer service programs.
- Open an Account: Once you decide on a provider, opening an account is easy! Most companies try to make their platforms as straightforward as possible. So, go to your provider’s website and fill out your information to get started!
- Transfer Funds or Rollover your 401k into your New Account: Now that you have an account, it’s time to add funds to it to start investing. You can either transfer money from one of your bank accounts, transfer funds from a different IRA account or rollover a 401k plan from a previous job.