Investing in a Roth IRA is one of the smartest financial moves a young adult can make. It’s actually not even that hard to set up a Roth IRA either. By adhering to the simple Roth IRA rules you could be well on your way to earning tax-free income that automatically goes right into your account. You will not be taxed when you withdraw from the Roth IRA upon retirement. If you’re heeding sound investment advice then you could also make use of the flexibility of a Roth IRA by investing it with stocks, mutual funds and even real estate. If you have never given a thought to why you need a Roth IRA, now is the time.
What is a Roth IRA?
In simple words, it is a retirement account, for individuals, offering tax-free benefits for retirement. However, the benefits of the Roth IRA depend on the investor’s tax bracket: if you are anticipating a higher tax rate at the time of your retirement than your current rate, the Roth IRA is more meaningful. Go ahead and invest in a Roth IRA before your tax deadline hits reality.
Roth IRA Tax Benefits
The best thing about the Roth IRA is the tax benefit. Here’s how it works: Let’s suppose that a 25-year-old contributes $5,000 each year (that’s the current limit for Roth IRA contribution) till retirement age (65). Considering the annual ROI to be 8%, the person will have about $1.4 million – tax-free! There’s no need to pay one cent of the money to anyone.
The same person, if investing in a Traditional IRA, will have only about $1 million at the same time due to tax deductions. The only fact to be wary of is that if any withdrawal is made before the age of 59 ½ there will be a penalty charge of 10% on the investment plus a tax payment on the amount. So, it is best to leave the money untouched until the minimum withdrawal age limit is reached.
Advantages of the Roth IRA
A Roth IRA is an indispensable tool in any young person’s financial life. You CAN take money out of your account if you run into any financial hardships (see IRA hardship withdrawal or borrowing from your IRA). However, make sure to note that withdrawing from your Roth IRA before retirement will result in a payment of tax and a penalty if done before the minimum age of 59 ½ years.
Did you know that you can use the Roth IRA to buy your first home? For this sole purpose, the Roth IRA allows you to withdraw $10,000 to help you achieve your dream. This is both tax and penalty free. However, you should have opened the account at least 5 years before this.
The money can even be used for your child’s education. You don’t have to fund the entire education cost with your retirement fund – no, this is a fund that no other plan offers. You’ll need to have a separate account for your child’s education. The Roth should only be used to pitch in the few extra dollars that are needed. It’s main purpose is for your retirement, so make sure to keep that in mind. It may be temping to tap into all this money, but taking money out of your IRA is the last thing we’d recommend doing.
How to Open a Roth IRA?
It is a good idea to first scout for the best IRA company to open your Roth IRA with to help avoid any unnecessary fees and charges that a lot of IRA brokers like to charge their clients.
Our recommendation is to choose to go with a no-fee Roth IRA provider. You will reap the benefits in the long run and there are many investment companies that will be able to assist you with opening a Roth IRA and helping you get started on the correct path for retirement.
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