We have established that the 401(k) is a great way to save for retirement. Now let’s introduce another account that will put you on the fast track to retirement: the Roth IRA. If we look at retirement like we do Mariah Carey albums, a 401(k) is Butterfly and a Roth IRA would be The Emancipation of Mimi. Both are great and it depends on the person whether they view it as the magnum opus.
Enough stanning. Time to talk about the Roth IRA. A good place to begin is with its name. IRA stands for Investment Retirement Account. Roth is for Senator William Roth. Senator Roth was a bit troubled by the low savings rate in the United States. He wanted to create a version of the IRA that would be more hip and cooler to entice younger investors. Lo and behold, he got his way back in 1998 and BOOM the Roth IRA was born.
That Senator Roth was a bit of a visionary, but I’m sure he ever dreamed that his creation would grow so popular. A study back in 2016 showed that over 20 million households were rockin’ a Roth to the tune of $660 billion. Not too shabby, Senator.
Roth IRAs have a maximum income limit to qualify. No need of getting you all lathered up only to find out you make too many ducats and can’t join in on the fun. As posting date (May 2019), the income qualifications and respective maximum contributions are:
|Filing Status||2019 modified Adjusted Gross Income (AGI)||Maximum Contribution|
|Married filing jointly or widow||Less than $203,000||$6,000 ($7,000 if over 50)**|
|Single, head of household, married filing separately||Less than $137,000||$6,000 ($7,000 if over 50)**|
**Contributions are reduced if AGI is more than $193,000 for married filing jointly and $137,000 for single, HOH, or married folk filing separately.
So why in the heck would you want a Roth IRA? There are some awesome benefits to putting your ducats in a Roth IRA. Wanna hear them? Here goes:
- Since contributions are on an after tax basis, you don’t have to worry about paying taxes on them in retirement. One less thing to worry about whilst you’re chillin’ on a villa in the Maldives.
- Roth IRAs flexibility make them a great place to store your emergency fund. This is because your Roth contributions can be withdrawn penalty free. You may also withdraw penalty free money for buying a home, college education expenses, medical expenses, and back taxes.
- No minimum distributions. This means you can pass money to heirs and it is what? TAX FREE!!! The gift that just keeps on giving.
Are you ready to take this Roth IRA plunge? Good! I’m sure you’re wondering where in the heck you can get a Roth. This will depend mainly on how hands on (or off) you want to be with your investing. Don’t be afraid to be hands on with your Roth IRA. You can build a pretty sweet and diversified portfolio with 2-4 mutual funds. However, if the thought of building a portfolio scares you, there is an option…a robo-adviser. A robo-advising firm will pick a portfolio for you based on your age, risk tolerance, and other criteria. The trade off is you will pay a small fee for their services, but can’t put a price on peace of mind, right?
Also, take into consideration where other investment accounts are located. If you have a 401(k) at Vanguard, may be easier to open your Roth IRA there. DIAR’s recommendation is open your Roth IRA at one of the big 3: Fidelity, Charles Schwab, or Vanguard. These three brokerages offer a bevy of investment products that you can buy for your Roth IRA with little to no commissions or fees.
DIAR’s tips for taking full advantage of a Roth IRA:
- Max it out! I know that 6 racks by December 31 seems daunting. However, you have until April 15th of the following year to get that $6k into the Roth. Set aside as much as possible each month during the calendar year. Make up any shortfall (or as much as you can) before April 15th of the following year.
- Invest in low cost funds. I know it’s tempting to buy up a bunch of Apple stock with your Roth IRA contributions. Let’s be more practical and simple. Also, no municipal bonds because they are already tax-exempt.
- I cannot stress this one enough: BE PATIENT!! Don’t let market drops derail you. Don’t panic and start selling investments. Let me the market do its thing. Keep reading DIAR so you’ll be comfortable and secure in your knowledge of your investments.
Let’s put this baby to bed. Roth IRAs are simple, hence this pretty short article on the basics. Roth IRAs are an excellent complement to the 401(k). A nice tag team of these two bad boys will have you coasting down the highway to retirement.