In this 5-7 minute article:
- Retirement… already?
- No taxes?
- What is a Roth IRA
- How to set up a Roth IRA
- Amassing millions with your Roth IRA
Let’s be honest, I can almost guarantee that 90% of you who are reading this article are not thinking about your retirement yet. Why would you? Depending on when you want to retire, it could be more than 40 years from now! In this post, I hope to explain to you why 40 years could be worth millions of dollars to you, and how you can retire rich: the easy way.
How much money will you need to retire? Well that depends on the person, but you can take steps early on to make sure that you’re almost guaranteed to have enough.
There are multiple forms of IRA’s (Individual Retirement Accounts/Individual Retirement Arrangements), but in this article, I’m going to touch on what a Roth IRA is, and how it can help you.
The main goal of an IRA is to save for retirement. One of the best things that our Millennial/GenZ generation has going for us is that we have time on our side! Two things that mix extremely well together happen to be time and investing, primarily because of compound interest, covered in another article.
But how does an IRA work?
There really isn’t much to it! You take money from a bank account, put that money into an IRA account, invest in various funds or stocks you believe have potential for growth, and you let it grow until you’re ready to retire and take the money out.
In the case of a Roth IRA, all the money you withdraw at the account’s maturity date (the date at which money in the account can be withdrawn without penalty), is tax free! I’m sure if any of you reading this have ever received a paycheck, you understand that you’re not entitled to your full paycheck because taxes are withdrawn. Much like your paycheck, money you earn from investing is subject to taxes (with some exceptions), which is why this tax free withdrawal of money from a Roth IRA can be so useful!
There are a few catches to this though.
Each year, you’re allowed to contribute a maximum amount ($6,000 this year), which is subject to your personal situation based on income or marital status. For example, you’re only allowed to contribute up to your AGI (Adjusted Gross Income) in any given year. Say you’ve made $3,500 by the end of the year, at the end of the year you will only have been able to contribute $3,500 rather than the $6,000 maximum. On the other end of the spectrum, let’s assume you made $139,000 by the end of this year. You’re now completely ineligible to contribute to your Roth IRA because your AGI is over the maximum amount that you can earn this year to be eligible to add money to your account. Finally, if your AGI this year is between $124,000 and $139,000 you can contribute a reduced amount.
Another catch that I touched on earlier is that you’re not allowed to remove the earned money from your account without penalty until you have reached the age of 59½. At this point, your Roth IRA will have matured, meaning the money that you have earned is available for use. However, you’re generally not required to withdraw the money until you’re 70½.
But why would you put away so much money at an early date?
For context, let’s assume you’re 18 years old in this example (the age at which you can start your own Roth IRA without permission and cosigning from a legal guardian).
On your 18th birthday you put $6,000 into your account, do your research, and invest in some funds or securities that you believe are going to be successful in the coming years. That year your account value increases by 7% (accounting for all other factors such as inflation). Fantastic! At the end of the year your account now has a value of $6,420. Not bad for not having to do any physical work other than research…
The next year you decide to do the same thing and add another $6,000 to the account. At the beginning of the year, your account is worth $12,420. You earn another 7% that year in the market after doing some great research and careful investing! That account has now grown to $13,289.40. Because you like your results so far, you decide to do the same thing until your account has matured.
When you turn 59½, you check your account balance which reads $1,334,912.45. That’s a nice sum of money to help out for retirement (although it can be a great idea to consider exploring the option of using more than one retirement investment vehicle). With little to no effort, your money was able to work for you over time to provide you with an awesome result at the end of its 41½ year shift!
So now you want to start up a Roth IRA… What are the steps?
To begin, you’re going to need to choose what company you want to use. A few examples include TD Ameritrade, Fidelity, or Vanguard, but it’s all up to you on which one you prefer. They differ through their user interfaces, service, and trading fees. It’s never a bad idea to do a basic google search on them all and check out the features. If customer service is something you really value, give them each a call and ask them to walk you through the features. While they’re doing so, gauge how helpful they are and how polite they are over the phone. I’ve found this to be an excellent judge of how a company will treat you if you open an account with them. However, do keep in mind that one customer service representative may not be able to accurately reflect a company as a whole.
You’re then going to need to open the account. There should be instructions for how to do this on the website of whatever company you choose to work with. If you don’t want to mess with doing so on your own, you should choose a company to work with that has a brick and mortar location near wherever you live. Should you choose that route, go in to the building, explain what you want to do, and someone from the company will help you.
After you’ve opened the account and deposited some money into it, you’re ready to invest. Be sure to do proper research on what would be (in your opinion) a logical investment. Keep in mind that you can always lose money in the stock market, so it is unwise invest money you can’t afford to lose. It’s important to understand that you are investing for the long term because this is a retirement account.
Still have questions?
Should you have any questions about Roth IRA’s or IRA’s in general, feel free to contact me. Another great resource is the IRS website at this link for more details on IRA’s.