One of the easiest ways to start investing is through a retirement account. Roth IRA is a popular option to start saving for the future, so dive into this article!
If you work at a company that offers a 401(k) plan, you are on your way to saving for retirement. But if you don’t, you need to start checking your options and be your own vehicle for saving.
Roth IRAs are a great option when it comes to saving for retirement, as they offer two main advantages over the typical workplace retirement plan: you get to pick your own investment and your earnings grow tax-free.
You can open a Roth IRA account at any brokerage firm. The true advantage of a Roth IRA account is its tax-free growth, that you can begin withdrawing by the time you reach 59 and a half, as long as you’ve had the account for over 5 years.
This is because you already paid taxes before funding the account, so you can actually withdraw your contributions at any time, tax and penalty free. Actually, there are even some exceptions to the penalties for withdrawing money before reaching retirement age, including if it is used for college tuition or a first-time home purchase.
If you are a single filer or head of a household filer with an adjusted gross income below $139,000, you can contribute up to $60,000 to a Roth IRA. The maximum income limit for a married couple to contribute is $206,000.
As Roth IRAs are operated through brokerage firms, they offer a wide variety of investment options like stocks, bonds, mutual funds, ETFs and CDs. This way, you can manage and diversify your portfolio. Some firms offer Roth IRA accounts with no annual maintenance fees or minimum deposits to open.
ROTH IRA VS. TRADITIONAL IRA
Deciding which one is the best retirement account for you can be, sometimes, a little bit overwhelming. Especially if you don’t have all the information you need to make that decision. There are a lot of ways to start saving for your retirement, including Roth IRA accounts and Traditional IRA.
A Traditional IRA is a type of retirement savings account that allows you to save pre-tax money to use during retirement. Similar to a Roth IRA, a Traditional IRA is “tax-advantaged” account because you can deduct your taxes before contributing and then you pay taxes again when you withdraw.
What’s the difference between a Traditional IRA and a Roth IRA?
The difference is, basically, when taxes are paid on your contributions. While all retirement accounts are tax-advantaged, that doesn’t mean account holders avoid taxation.
For Roth IRA, the tax advantage is experienced in the long term, because taxes are paid at the time of contribution, allowing for tax-free withdrawal of the funds, no matter the growth. However, there’s an income cap for contribution: the only ones that are eligible to add to their Roth are those who earn under $139,000 in 2020.
On the other side of the coin, Traditional IRA accounts are considered to be tax-deferred, which means you won’t pay taxes when you contribute to your account, but you will pay taxes when you withdraw the funds.
Who is eligible?
The great part of Traditional IRAs is that almost everyone is eligible. The one requirement is that you have a taxable compensation. What does it mean? That your main source of income is from a salary or wages and not from other methods like interests, rental properties, etc.