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So maybe lately you’ve been looking into retirement options because you feel like you should start saving or maybe you’ve already invested in a 401k plan through your employer and have heard of this thing called a Roth IRA. Either way, you are probably reading this article to learn more about what the f#ck a Roth IRA is. While there are plenty of different retirement options out there, this article will specifically focus on Roth IRAs and why you should look into it, so let’s jump right in.
What the F#ck is a Roth IRA?
Roth IRAs where established by the Tax Relief Act of 1997 (Sec. 408A). The word “Roth” comes from the Act’s chief legislative sponsor, Senator William Roth of Delaware and “IRA” stands for Individual Retirement Account (IRA). Throw those two words together and viola! The term “Roth IRA” is coined. Essentially, a Roth IRA is a type of retirement account that you fund using after-tax money (aka post-tax money, the money that gets deposited into your bank account).
What do you mean “after-tax”?
Say you receive your bi-weekly paycheck from XYZ corp. Usually your pay stub will list your gross income at the top and a bunch of paycheck deductions for things like health care, 401k contributions, taxes, social security, etc, which leaves you with your actual net or better known as your take home pay. Once the taxes are taken out, you are left with “after-tax” money. You can use that money, since the taxes have already been taken out, to fund a Roth IRA (up to a certain limit as specified by the IRS).
So What does that mean for you exactly?
The downside is that you won’t be able to deduct your contributions on your income tax filings for a Roth IRA. However, since you are funding your Roth IRA with after-tax money, when you hit retirement age, your earnings (capital gains) and withdrawals on the money you’ve put in are generally tax-free! To simplify that even further, once you reach retirement, you typically* won’t have to pay taxes on the money you withdrawal from your Roth account. This is the beauty of a Roth IRA. Basically, a Roth IRA may be something you want look into and research, if you think that your tax rate/bracket will be higher for you at retirement than it is now.
What else would be good to know about this Roth IRA thing?
- $5,500 ($6,500 if you’re age 50 or older); or
- You can click here for additional contribution amount information
2.) Your Roth IRA contribution might be limited based on your filing status (single, married, etc) and income (see chart below**). By the way, in the chart below, AGI stands for modified “adjusted gross income”.
**Table taken from IRS website, click here for more information. For example, if you are single, head of household, or married filing seperately and you do not live with you spouse at any time during the war and your AGI is between $120k but less than $135k, you can contribute a reduced amount to your ROTH account but not the full $5,500.00.
3.) There are eligibility requirements to be able to invest in a Roth IRA. if you make over a certain amount (single and/or combined with a spouse), you may not be eligible to fund a ROTH IRA.
4.) Early withdrawal of your contributions (aka money you’ve put in) is possible, without penalty, but under a certain set of circumstances and not before 5 years of your initial contribution. AKA you can’t take out any money until after 5 years from your first deposit/investment into the account.
How do I open an Account?
There are plenty of big name brokerages out there like Fidelity, Vanguard, E*trade, etc., that are dying to have your business. Just make sure you do you due diligence before you open and shop around. A few things to check out would be there account minimums, fees, investment offerings, and so on.
But wait, so should I invest in a Roth IRA or Nah?
Really, thats up to you to decide and figure out what will be best for you. A Roth IRA, should you meet the eligibility criteria, is just one of the many investment options available to you. To summarize, with a Roth IRA, you pay taxes up front, on the money you put into your account (you can only put up to $5,500 in your Roth IRA account for 2018), so at retirement, you don’t have to pay taxes on the money you take out.
Remember taking the time to invest in yourself and your future is one of the most important invest you can make.
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