The goal of this article is to share with you in very simple layman’s terms everything you need to know about a Roth IRA.
A Roth IRA, it’s just a name that’s given to an account. Kind of like your checking account, you know that your checking account is the account that you move money in and out of to pay your bills. You know that your savings account is money that you put aside for a rainy day, and maybe you get a little bit of interest, probably not a lot.
So a Roth IRA or an IRA is an account with money in it saved for your retirement. But here’s the thing in a Roth IRA, the IRS says, we’re going to give it the title Roth IRA, and that’s going to mean a few things. There are a few rules you should know. So the first thing you should know is that a Roth IRA is just a basket, it’s a basket that you’re going to put money into, stay with me okay?
It’s very similar to a traditional IRA, but because it says Roth in front of it, it’s going to kind of decide how it’s going to decide the money that you put in, in a traditional IRA, there’s a certain way you put money into it. In a Roth IRA, you’re putting money into this basket, after you’ve already paid taxes. So it’s what they call post-tax, okay?
All right, so you’re going to take money that you make from your job, any earnings that you have from, maybe you’re self-employed, it could be anything. But as long as you’ve already paid taxes on the money, let’s say in your paycheck, you get paid a certain amount, you pay your healthcare, your Medicare, your Social Security, your state tax, if you have it your federal tax, that money that’s leftover, you can put into this bucket. Now you can put $5,500 into it, or 6500, if you’re over the age of 50, okay? They allow you a little bit of money to catch up there. So you’re going to contribute money into this basket after you’ve already been paid.
The money that’s in this basket doesn’t do anything unless you do something with it. Now, in a checking account, you move money in and out to pay your bills in a savings account, you move money into it, hopefully, to save for a rainy day, in a Roth IRA, you’re moving money into it for retirement. Now, once the money’s in there, again, it doesn’t do anything, you have to do something with it, or get a guy to do it for you.
And what you can do is you can invest that money in really anything you want. I mean, it’s, there are almost no limits as to the things that you can invest in. So you can put in some stocks, maybe mutual funds, bonds, if you want to invest in real estate, you can even do that. Really ROTH IRA funds can go into any investment you can imagine.
All right, there are a few other rules you want to consider here. And that is, this is a retirement account. So you’re contributing, I don’t know, hundred dollars, $200 a month, or whatever you want to put into it, as long as you don’t go over the 5500 or the 6500. Now, retirement, what does that mean?
Retirement means you’re going to leave the money in there until you’re 59 and a half, I don’t know why they put the half in there. That’s, that’s whatever, but 59 and a half.
Once you get to that point, then you’re going to be able to start taking money out without paying tax, because you already paid the tax while you were contributing. This is beneficial because maybe you think you’re going to be in a higher tax bracket when you retire, you might want to work past 59 and a half, but still take a little money out.
And that puts you in a higher tax bracket, well, it doesn’t matter with a Roth IRA, because you’ve already paid your tax, right. So a couple of other things you want to think about with a Roth IRA, again, the investments, the money doesn’t do anything, unless you invested in stuff, it’s kind of like having a checking account that you just put money into, and you never do anything with it, eventually, you’re gonna have to pay a bill, you’re going to have to do something right? Your car breaks down or something. In the Roth IRA, you’re going to pick your investments, I can help you with that jazz here at Save Your Bucks.
But there are some times when you can take the money out and not have to pay a penalty. See, the rule is you agree to wait till 59 and a half, and the government lets you let that money grow. If you take it out beforehand, then there’s sometimes there’s going to be a penalty, it could be 10%. And that money that you take out, it’s not helping you anymore, you’re not letting it grow. Right now, with a Roth IRA, it’s much more flexible than a traditional IRA, because you’re allowed to take the money out that you’ve contributed. Here’s the thing, you know, Roth IRA, you’re putting money in after you’ve already paid tax, that’s your money. as it grows, you’re going to have earnings. So you’re going to have your contribution, I’m just going to go like this, then you’re going to have earnings.
Growth is the same thing. Okay, so you’ve got this return, hopefully, some of it was your money, the rest of it was appreciation, maybe you picked some good stocks, or you had a good portfolio that grew over time. Now, this portion of the money you can take out whenever you want because you already pay taxes on it.
So, the government says if you’re going to put money in this post-tax, and you need to get some of it back, we’re not going to tax you because you’re already paid tax, no problem, this portion of the money if you decide you’re going to take that out before 59 and a half.
We’ve got some problems because you’re not following the rules. This is not your money, its growth. And the government says Well, hey, you know, you put this money in, but this money grew, there may be some penalties associated with that as well. So just keep that in mind.
Now, in a traditional IRA, you’re putting money in before you pay tax. So if you decide, I don’t know, three, four or five years from now, you want to take some money out, you’ve got a problem, you’re going to have to pay a penalty and taxes, not the case with the Roth.
You can also take money out for medical expenses, college expenses, maybe you’re going to buy a house, your first-time homebuyer, there’s a lot of different reasons you can take money out. Now, this is the basics of a Roth IRA, you can open a Roth IRA anywhere, or if you have an existing one.
But if you need someone to help you with the investments in the IRA, the Roth IRA, many experienced brokers can help you. Many specialize in building portfolios for individuals, that is not an automated investment service.
Look for someone that can provide you personal service not one of those big companies that every time you call them, they’re trying to sell you a mutual fund or sell you some products so they can make a commission.
Look for a fiduciary. And that’s just a fancy way of saying that they always put your needs ahead of their own. Many believe that a ROTH IRA is the best investment tool in the market, especially for younger investors.