You’re probably here for one of three reasons.
1 – Don’t know what a Roth IRA is and are curious about it,
2 –You’re maxing out your 401K and want other options,
3 –You don’t have a 401K and are desperate for retirement options.
You’ve come to the right place.
Roth IRA’s are like the cool kids of retirement.
They’re one of the fastest ways to boost your retirement savings.
Roth IRA = less work, more money.
If you look at your 401K and think, “How am I supposed to live off that?!”Or, like me, you don’t have a 401K, then the Roth IRA is your saving grace.
Some gracious being decided to help our poor, no-retirement, souls and give us a fighting chance to retire with the rest of ’em (and even retire a little earlier!)
So, what is a Roth IRA? And will it even help you retire early?
Let’s clear the air first – there are two types of IRA’s, a traditional IRA and a Roth IRA.
They’re both investment accounts but have one significant difference: traditional IRA’s use before tax money but is taxed when you take it out (at retirement.)
A Roth IRA is AFTER TAX money, but tax free when you take it out.
In this post we will only be talking about the Roth IRA. (I also personally use a Roth and find it’s the best retirement account when time is on your side.)
A Roth IRA is an Individual Retirement Savings Account with higher interest than normal savings account.
Within this magical, millionaire making savings account you pick different investment options like mutual funds, individual stocks and bonds. That’s where high interest comes in.
You can diversify your IRA as much as you like depending on how safe you want to play it.
What is a Roth IRA? Actual Definition:an individual retirement account allowing a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.
My (Not so) Secret Savings Account
“I need to get a start on preparing for retirement.” I hear this all the time, and the Roth IRA is always my answer.
If you’re wondering if you actually need a Roth IRA even if you have a 401K my question to you is, would you say no to free money?
Most 401K’s won’t have enough to get you through retirement. It’s your gain to free money when you open up a Roth.
What is a Roth IRA? (The nitty gritty)
Roth IRA’s are a high interest savings account.
When you hear (or, in this case, read) high interest you’re probably immediately taken back to that time when a sleazy car salesman said you were “getting an awesome deal” but you found out later that you just made the worst mistake of your life when you realized you were paying double the cost in interest on a 15 year old car.
This isn’t a sleazy salesman.
Roth IRA’s get their high interest by investing your money in common stocks or bonds.
But, obviously since it’s your money you have a choice and can invest your money in mutual funds, exchange-traded funds, individual stocks or cash money market accounts.
This is what gets you that high interestof 8%-12%. Yes, this is real life.
Any talk of stocks can be scary. And it should scare you a little bit.
I’ll be the first one to tell you that stocks make me straight up uncomfortable.
Think of it like a spider. If you see a spider in your house you’re probably going to look it up to try and see what kind it is (after you kill it, of course).
You then realize that it’s nothing to be worried about it.
You’re still going to watch your back, call an exterminator and maybe consider burning the house down.But, you can sleep a little better knowing that if bitten all you’ll get is an annoying, itchy spider bite.
Same thing with the stock market – it should scare you enough to make you want to be knowledgeable about it.
After you realize that it’s not there to hurt you (and can, in fact, help you) you can rest a little easier knowing that your money tree is growing safely in a Roth IRA.
What is the max you can contribute to a Roth IRA?
(Contributions limits have changed, updated as of 05/19)
Because they’re afraid you’ll get too rich, there is a max amount of money you can contribute into your Roth IRA.
Little do they know I spend too much money on food to really be rich. (Hangry problems.)
For people UNDER 50 the max contribution is now (as of 2019) $6,000 a year. If you’re 50 OR OLDER you get an extra $1,000 and can contribute $7,000 a year.
BUT – the thing you have to watch out for is income levels.
For you single people, as long as you don’t make more than $122,000 a year then you don’t have a thing to worry about.
If you’re making between $122,000 – $136,999 then you can still make a partial contribution. Anything above that $137,000, is a no go.
For all you married couples you have a little bit more leeway. You can contribute the full amount up to $193,000. If you’re between $193,000 – $202,999 you can make a partial contribution.
Is the account tax free?
We all hate taxes.
You’ll be happy to find out that the Roth is tax free.
You’re putting in your own money after taxes are taken out, but you don’t have to worry about being taxed when you take it out. Not even the interest you’ve made is taxed!
To me, not having to worry about your money being taxed at retirement is worth putting your own taxed money in.
This is a Retirement Account:
The Roth IRA isn’t just some random savings account with high interest.
This is a retirement account and has rules just like your 401K does.
That means no touchy until you’re 59 1/2. However, there are a few exceptions to that …
Can you take money out early?
Even with these Roth IRA rules, there’s a few huge benefits. (Besides the obvious of saving more money.)
Unlike your 401K, you ARE able to take out of the Roth early without any penalty. BUT – the account has to be open for 5 years and you can only take out the money you put in, none of the interest that has built up (or there will be a penalty).
There are two exceptions to taking money out early:
You CAN take out the money you put in, plus any interest earned if you’re purchasing your first home or, would like to use it on college expenses.
So, if you put in $5,000, left it sitting for five years and had 7% interest, you have an extra $2,000 dollars in there! You can take all of that $7,000 and use it as a down payment on your first home. PENALTY FREE.
There is one catch (you’ve been waiting for this … there’s always a catch!)
If you’re buying your first home you can only take out up to $10,000 for costs – penalty free. AND your Roth IRA account needs to be open for 5 years to be able to take out for those exceptions.
Set it and forget it for 5 years, easy enough right?!
Starting the Roth IRA in 5 easy steps
1 – Put your after tax money in to a Roth IRA.
2 – Pick your investments. (I like to stick with the safest mutual funds, individual stocks and bonds.)
3 – Let it grow as you continue putting money in.
4 – Retire a millionaire.
5 – Book a trip to Cancun.
Even though the money tree is a myth, a Roth IRA isn’t. It’s a glorified savings for retirement.
You know those annoying student loans that gain a bunch of interest so you’re stuck paying them for what feels like the rest of your life?
A Roth IRA is just like that, but opposite. You can grow money in a positive way (called compound interest).
Once you put money into it, it hits the ground GROWING.
A typical Roth IRA has a return of 8% – 12%.
The more money you put in the more it grows.
The longer you leave it in ………….. you guessed it! It grows! Making this account perfect for retirement (even if you have a 401K).
Where do I open up a Roth IRA?
You can open up a Roth IRA at any bank or institution that offers one.
Wherever you bank at more than likely offers a Roth IRA. All you have to do is go in and ask to open one up.
At different places it may cost you a fee (like $5 bucks) to open it.
One of the banks we had looked at charged us 5% each time we put money in. That’s a joke, you can do better than that.
There’s so many options, just be sure to pick the one that’s right for you.
Personally, my husband and I use Fidelity. It’s easier for us to manage it online. There are no opening costs with Fidelity and no hidden fees.
After opening the Roth you can let them manage it, or you can manage it yourself.
If you know basic stocks, you can definitely manage it yourself.
Now for the real kicker, finding extra money to put into your Roth IRA.
You’re convinced this is what your family needs. And it’s true, your family does need additional retirement EVEN if you have a 401K.
More and more people are finding out they didn’t save enough when they get to retirement age, you don’t want to be one of those ones who mooches off your kids do you??
Remember, the max is $5,500 BUT there is no minimum you have to contribute. You can put in $100 a month and let it grow from there.
Wait a minute, what if I don’t even have $100 a month to contribute?
Here’s where you’re going to have to take a look at those expenses. Sometimes our expenses get the better of us and we realize a little too late they’re out of control.
You can check out my favorite guide here on finding out exactly how to gain control of your expenses.
Conclusion
So, what is a Roth IRA and how will you achieve early retirement?
When I first learned about a Roth IRA I literally wanted to tell everyone about this magical millionaire – making account.
You’re literally throwing money away if you haven’t started yet.
I started realizing that talking to your neighbors about their retirement plan is not something they’re comfortable with.
It’s my goal to make this the new normal.
There’s no reason to be scared when thinking about retirement.
Every day we’re getting closer to retirement. It’s inevitable, and the longer you try to fight it the less money you’ll have.
It’s never too early and never too late.
If you’d like to see how much you can get out of a Roth IRA you can check out the Roth IRA Calculator over at Bankrate. I love this calculator and it really puts things in to perspective for you.
From the calculator above, you can get a rough estimate of what you would have at retirement based on age, starting balance, contribution and return.
By only contributing $192,000 over the course of 32 years you will be a millionaire.
All you have to do is sit back, relax and enjoy life knowing that you’ll retire with over a million dollars.
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