So What is a Roth IRA?
A Roth IRA is a type of retirement plan that helps you to grow your money either with a higher risk or at a stable, slower pace. Because it is a retirement plan you can’t pull out the funds you put in until you are 59 ½ years old, but the money you put in there will offer you a much greater expected rate of return than a traditional savings account or an employer offered retirement plan. But, there’s a catch. If you make over $139,000 you can no longer contribute to your Roth, it’s still there for you compounding interest but the funds you have in it, are the finds you will have to work with until you want to pull it out. The best part is that the money you take out is 100% Tax Free! The money you put in has already gone though your Federal and State Taxes, Social Security, and Medicare, so when you put in in, that’s it! Your money continues to grow tax free even when you pull it out later in life. You can only contribute $6,000 a year to your Roth IRA account per year but that number changes to $7,000 when you turn 50. There is a way of adding more funds to your Roth through your 401k plan with your employer through a “Backdoor Roth.” A completely legal way of getting around the $6,000 limit.
The 2 Routes to your Roth
You can choose to take two different routes through your Roth IRA. The first is to go with rolling CD’s that mature at different dates to take advantage of changing interest rates. Or you can create an investment portfolio which isn’t FDIC insured and you could lose money. Investopedia recommends that younger people invest in the portfolio option because they have more time to play the economy and the stock market and grow their funds larger, faster. The CD option is 100% FDIC insured up to $250,000 but will offer less returns in the same amount of time than a typical investment portfolio. Most people a few years before retirement take their investments and turn them into CD’s to maintain the wealth they have grown over the years before retirement.
An Example
Assume that when you turn 18 you deposit $2,000 into a Roth IRA and choose to only go the route of CD’s. Every year you deposit $1,000 into the fund and never make above the maximum annual income(it can change over time). By the time you retire you will have made $112,013 more than a traditional retirement IRA or retirement package.
The Exception to Pulling Out Funds
The idea of leaving your money in the Roth IRA to grow and you not having access to it until you retire may be something that turns people away from a plan like this. However there is one exception. The IRS will allow you to pull out up to $10,000 once to use for a first time house purchase or downpayment. $10,000 is 5% of a $200,000 home so it is a good way to make sure you have some money ready for a home purchase. But that is unfortunately all you can do to take money out.
Final Remarks
A Roth IRA is something every young person should consider due to the time they have left before retirement to use their money in higher risk investment and try to maximize a return. It could grow much faster than inflation and certainly faster than a traditional Savings Account. Plus the $10,000 you can take out to buy your 1st house can really help a lot of people get started in life. So why wait! Open a Roth IRA as soon as you turn 18 to maximize your retirement fund and make the most of the money you make.
Works Cited
Chorpenning, Ashley. “What Is an Average Roth IRA Return?” SmartAsset, SmartAsset, 22 Nov. 2019, smartasset.com/retirement/average-roth-ira-return.
Hayes, Adam. “What Is a Traditional IRA?” Investopedia, Investopedia, 3 Sept. 2020, www.investopedia.com/terms/t/traditionalira.asp.
Segal, Troy. “Roth IRA Certificates of Deposit.” Investopedia, Investopedia, 28 Aug. 2020, www.investopedia.com/roth-ira-certificates-of-deposit-4770965.
Segal, Troy. “Roth IRA Certificates of Deposit.” Investopedia, Investopedia, 28 Aug. 2020, www.investopedia.com/roth-ira-certificates-of-deposit-4770965.
Segal, Troy. “The Complete Guide to the Roth IRA.” Investopedia, Investopedia, 28 Aug. 2020, www.investopedia.com/terms/r/rothira.asp.
When I first read the title of this blog, I had no idea what a Roth IRA was. You did very well explaining what it was and the circumstances, restrictions, and benefits regarding them. The example you provided was also very helpful for a general understanding and the understanding of how Roth IRA's work and how people can use Roth IRA's to benefit them better for the future after retirement. I'm wondering exactly what you mean by "Backdoor Roth."
ReplyDeleteYou made it very clear how important a Roth IRA is, especially if you start early. Your opportunity cost of not starting one early (and similarly with investing) is potentially thousands of dollars you’ll need down the line. I wonder- how does this compare to other retirement plans? I know that 401k’s are through your employer and Roth IRA’s are individual, but is there an advantage over the other? It seems to me like Roth IRAs are better in the long run and can amass a good amount of wealth, especially if you start early.
ReplyDeleteThis blog really helped me to understand what a Roth IRA is. I will strongly consider opening a Roth IRA when I turn 18. I would like to know what other kinds of retirement plans are available to get a better understanding of my options.
ReplyDeleteI never have heard of the IRA retirement plan before. I knew about 401k, but it's clear there are differences between the two plans. This post is making me wonder what one typically ends up with more money in the end for retirement. However, I don't exactly like the fact you cannot make more than $139,000.
ReplyDeleteYou did a really nice job presenting what a Roth IRA is, in addition to the different aspects of it. I really appreciated how in depth you were with your understanding, and how you demonstrated that through your writing - making it easier to understand for us as readers/learners. You gave clear examples of what a Roth IRA can do for you, and how to plan your "route" which was very helpful in showing us how to achieve this plan. Furthermore, your example gave us insight into how we may use this in the future. Yet, I do wonder what other options are out there and how they align to this retirement plan.
ReplyDeleteWhen reading this article I'd say that I've never heard of anything remotely related to Roth IRA. But, after reading this article it makes me happy to know a little more about it. Now, the example that you provided was well thought out. However, if someone were to turn eighteen where/how will they even know where to start by setting up a Roth IRA? Lastly, I've also noticed that you included information about leaving your money in the Roth IRA, what happens if a bank or the account that you had put aside for this particularly ends up shutting down, or even worse someone ends up finding a way to spend your money?
ReplyDeleteThis article was super informative for me because this I've never heard of a Roth IRA. It's super cool that it's a retirement fund that you can have open or closed, which can come with risks and advantages but you outlined them pretty well. It's great to know that I can start one of these and then use 10,000 of it to buy my first house which could become super handy later in life. I'm curious as to what specifically the "backdoor Roth" is?
ReplyDeleteBefore reading the article, I didn't even know 1 thing about what Roth IRA was. After reading the article, it has gave me a great understanding of what it is about and on how the information that was given. You have done a great job by, putting your blog together and information that you have found about Roth IRA. This blog, has very interested me lots, as in the future when I turn 18 I will look up to this.
ReplyDeleteYou did a really good job at explaining how this the Roth IRA works, as I had no idea what it was. I like how you broke it down into simpler terms and used an example so we could get a better understanding. I think this type of retirement account would be best for someone going straight into the work field instead of going to college, because they will be making more money to able to put away that 1000, where as college students won't have that money. You could also start this in your late 20's and it would be a great investment.
ReplyDeleteNice job explaining the whole system and the pictures really did help a visual learner like myself. It's crazy to think about a retirement plan at such a young age and needing to plan for it throughout your whole life. Great job on this piece!
ReplyDeleteGreat Job explaning what and how a Roth IRA works. I have heard what a Roth ira is but never fully understood how it works. Now knowing that it helps when retiring I will make sure to take advantage of that opportunity and put my money to work.
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