Real Talk: You (Yes, You) Should Open a Roth IRA This Year

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If you are an adult with earned income (that you report for taxes at the end of the year), then you should be saving for your retirement. The reality is that many of us can’t save for retirement because we need all our wages to… you know… live.

I totally get that! At some point, however, you might be in a place where you can save for your retirement so I want to share this info about a Roth IRA with you now so that you are set up for success in the future.

What is a Roth IRA?

A Roth IRA is an Individual Retirement Account that you put your after-tax dollars into to start saving for retirement (after age 59.5). You pay the taxes on it now (so the deposit cash literally come from your wallet and doesn’t need to be deducted from your paycheck) and when you take the money out in retirement you pay no taxes on it (also no taxes on the earnings as long as you wait until you’re old enough).

That’s cool, why doesn’t everyone do a Roth?

There are some specific rules on who can contribute to a Roth IRA. Even if you qualify for a Roth, you are only allowed to contribute up to 100% of what you earned for the year or a max of $6,000 ($7,000 if age 50+) per year to all IRAs (Roth + Traditional) and there are income limits. If you make between $124k and $139k individually or $196k-$206k as a married couple then you can still put money into a Roth but not the full amount. If you make more than those ranges, respectively, then you cannot put money directly into a Roth account.

Yeah I make way less than those numbers… so tell me more

If you are eligible to contribute to a Roth there are some benefits to be aware of.

  1. You can use Roth IRA money (up to $10k) for the first time purchase of a home

  2. You won’t be taxed on this Roth money in your retirement

  3. If you never use your Roth money and leave it to your next-of-kin, they won’t need to pay taxes on it either

Okay, so Roth IRAs are good. But why open one now?

In order to use some of the benefits of the Roth account, it needs to be opened for 5 years before your first withdrawal. That means you need to open an account now if you want to use any of that money for a home purchase 5 years from now.

Withdrawing before the 5 years will be subject to a 10% penalty!

Seriously, you only have to open a Roth IRA with $1 to start that 5 year clock. Your local bank or credit union most likely offers Roth IRAs so you don’t need to put anything in the stock market if you aren’t comfortable.

Aren’t there rules around IRAs?

Yes. Other than money you would use for a new home purchase (up to $10k), don’t put money into the Roth account that you will need short term. If you withdraw from the account before age 59.5 you will pay a 10% penalty. Only use the money you can spare toward your retirement to fund your Roth IRA and only during a year that you have earned income. If you didn’t make at least $6k in the year then you are only allowed to put in up to the amount you actually earned.

What if I’m above the income limit?

There is still a way to contribute to a Roth but the rules are trickier and you will need to consult a tax advisor first.

If you qualify to put money into a Roth IRA, start now! You’ll thank yourself later.

If you have any questions or topic suggestions for either small business or basic financial content, please let me know!

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