14 Things Every Twentysomething Needs To Know About Roth IRAs (2024)

Nancy DeRusso describes a Roth IRA in a simple and straightforward way: "investing with after-tax dollars."

Basically, a Roth IRA is a retirement account where you can deposit post-tax money to grow your future nest egg. Post-tax means income that you've already paid taxes on.

Once money is in your Roth IRA, then you can ~allocate~ or divide it among different stocks, funds, and other investment assets. And when you wanna take money out of your Roth IRA, you can take this out tax-free as long as certain conditions are met (we'll get to those in a minute).

BTW, here are some vocab words that are important to know:

• Contribution: money you put into the Roth IRA

• Distribution: money you take out of the Roth IRA

All these different retirement accounts can be confusing, so here's your cheatsheet to all the differences:

Roth (Roth IRA or Roth 401(k)):

• You're contributing money that's already taxed

• When you withdraw the money to use it, you don't pay taxes

Traditional (traditional IRA and traditional 401(k)):

• You're putting money in that hasn't been taxed yet

• When you withdraw the money to use it in retirement, that's when you pay taxes

IRA vs. 401(k):

• 401(k)s requires an employer to sponsor this retirement account

• IRAs don't require an employer, so anyone can open one

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Generally, you can't withdraw money out of a traditional IRA or 401(k) until you turn 59 1/2 years old, or you'll get hit with a 10% early withdrawal penalty. But Nancy says one of the main benefits of a Roth over a traditional IRA is the "ability to take your contributions without tax or penalty at any time."

You can also take out earnings without the penalty for certain specific items — for instance, you can take out up to $10,000 for first-time homebuyers!

Another big difference: "With a traditional IRA, you're required to take some sort of minimum distribution once you hit age 72. But with a Roth, you don't have to." This means that with a Roth IRA, you get to decide when you want to take money out.

Nancy recommends, "When you take those distributions, make sure you actually talk to a human to make sure that you're doing the right thing at the time." This stuff can be tricky (and mistakes can be costly), so it helps to have an expert talk you through it.

You might think that you need an employer-sponsored 401(k) to start saving for retirement, but Nancy says that's just not the case. "The Roth IRA you do outside on your own, so it doesn't matter what company you're with or where you are."

Since a Roth IRA doesn't need to be tied to an employer, it's a great option if:
• You're self-employed

• Your employer doesn't offer retirement benefits

• You have a 401(k) and want to open an additional investment account to supercharge your retirement savings

If you have a 401(k) that you wanna roll over to an IRA, it's a relatively simple process that involves filling out some forms. But keep in mind there are some rules for rollovers:

• You can roll over a traditional 401(k) to traditional IRA or Roth 401(k) to Roth IRA easily and without paying taxes

• If you want to roll over a traditional 401(k) to a Roth IRA, you will have to pay income tax on the rollover amount that year

• You are not allowed to roll over a Roth 401(k) to a Traditional IRA

Roth IRAs have two big restrictions:

• Income limits determine if you are even allowed to open a Roth and how much you can put in.

• Yearly contribution limits tell you how much you can put in every year.

The IRS has rules on how much you can contribute based on your income. In simple terms, you can't contribute at all if you make more than $208,000 (married) or $140,000 (single).

Not to make it too confusing, but this limit is based on your income before certain deductions — the IRS calls this modified adjusted gross income (MAGI).

If you're interested in the very specific details, you can read about how to figure out this exact number for yourself here.

You can put up to $6,000/year into IRA accounts (up to $7,000 if you're over 50 years old).

To be clear: If you want multiple IRA accounts (Roth or traditional), the max is $6,000/year total, not $6,000/year into each account.

On the other hand, there’s no IRS minimum that you have to contribute. But there may be minimums depending on the company that you're opening the Roth IRA with.

jordan @jordan_stratton

Government: You owe us money. It’s called taxes.Me: How much do I owe?Gov’t: You have to figure that out.Me: I just pay what I want?Gov’t: Oh, no we know exactly how much you owe. But you have to guess that number too.Me: What if I get it wrong?Gov’t: You go to prison

01:17 PM - 16 Apr 2019

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It’s called the Backdoor Roth, but it’s not shady or illegal.

According to Nancy, instead of contributing to a Roth IRA directly, "you can make a non-deductible contribution to a traditional IRA and then convert that into a backdoor Roth."

Some things to note with this:

• This isn't tax evasion, so the year that you convert the money from the traditional to Roth, you will pay income tax on it.

• "For each IRA conversion you make, you have to wait a separate five years" to be able to withdraw money.

The process can be complicated, so it's generally a good idea to talk to a financial advisor if this is something you're considering.

Financial institutions like banks or brokerages offer Roth IRAs. It's up to you to decide who to go with. You can try:

• Asking if your bank offers it

• Doing research to find a broker that works for you

• Ask a financial advisor for help on how and where to start one

• Using an investing app like Acorns

But Nancy notes that "people love to just read and get informed, and you can get in circles with the nuance. Before you actually make the decision, have a conversation [with a financial advisor]." Seeking out advice from a financial pro or a pal with more money knowledge can be really helpful if you're still not sure where to start.

Regardless of whether you decide to open a Roth IRA or not, Nancy left me with some great advice:

"Understand your entire situation to help you make a more informed holistic decision."

At the end of the day, your situation is unique and you know your own needs best. Always do your research, seek out expert opinions when you get stuck, and do what's best for you.