So, what exactly is a Roth IRA and how does it actually work? Essentially, a Roth IRA is a retirement account that grows over time in savings. Key benefits include tax-free growth on each of your investments. However, not everyone will qualify for this. Those who qualify, will be dependent on how much they earn annually.
Having a Roth IRA, will allow you to receive a tax break on the money you withdraw later for your retirement. Having saved up over time by tucking away bits of money, will add up when you reach retirement. Typically, most people can contribute $5,500 dollars per year.
The setup is a bit different, compared to a 401K or a traditional IRA where your money is then taxed. To open up a Roth IRA, you will need to find a brokerage. After this, you will select what you would like to invest into. Examples of this are, exchange-traded funds (ETFs) among mutual funds, stocks and bonds.
The entire process of opening a Roth IRA is fairly straightforward. First of all, you will need to provide selected personal information that is typically used upon opening an account at any bank comparably. These types of things include your birthday and your Social Security number.
What is interesting is, while using a Roth setup – savings you can withdraw your contributions at any time without paying any type of taxes or other penalties. In times of desperation, a Roth account can even be used as an emergency savings account. When you reach retirement, there will be no required minimum distributions compared to traditional IRAs.
However, there are certain income limits which have been setup for funding a Roth IRA. According to the data provided from 2018, the absolute maximum a worker can contribute to a Roth IRA fund is $5,500 dollars if they are under the age of 50. Those over 50 can actually add an extra $1,000 dollars each year in what they call “catch-up” contributions. The $6,500 maximum contribution amount is the same as it was back in 2017.
There are really two ways to start investing into a Roth IRA account. The first method is by being a “do-it-yourself” investor. Find an online broker you like and then choose your investments. Many believe having a diversified portfolio, is the best strategy for this.
Having even 3 or 4 mutual funds, should be enough to get you going. Many providers typically won’t have you pay a fee but want you to keep a minimum account balance active. Things to watch out for are any kind of trading commissions and investment fees, which are also known as expense ratios.
The other way to start investing into a Roth IRA account is by using what is known as a robo-advisor. These online investment firms, have trimmed any necessary expenses and passed them down to their customers. Typically a small fee is charged for their services but this is much lower than working with a human financial advisor.
The rates charged range between 0.25% to 0.50% of the assets under their management annually. Using a robo-advisor is a growing trend and likely will continue, as people want to save as much as they can. Likely you are wondering how much you can earn in your Roth IRA. This will depend upon what exactly you are investing into. Over all, the average annual stock market rate return has been about 10% a year.
In 2019, the amount you can contribute to will be around $122,000 dollars in annual income if you are single and if you are married $193,000 if you file your taxes jointly. Both of these numbers were slightly increased since 2018. One important note is, the contribution limit becomes reduced bit by bit until your ability to contribute is eliminated completely. This applies if your income is above these actual 2019 numbers listed above.
One example would be if a 20 year old decided to invest $5,000 dollars a year into their new Roth IRA. After 10 years of investing, they stop contributing. This would be because they would make more or possibly would need a tax deduction of their future contributions, for a traditional retirement type account. With an average of 8% of interest a year by the age of 65, this former 20 year old would have earned in savings growth of around $1,070,944 tax-free dollars.
In conclusion, it is recommended to setup and start a Roth IRA immediately if you have the extra funds. The best time to start investing is today and watch your money grow over time. Don’t forget that your money would not be stuck in your Roth IRA. You would be able to withdraw your money at any time since you have already paid taxes on that money from before.