Everyone needs to be thinking about and planning for the eventual moment when we stop working.
That means taking advantage of all of the financial tools that are at our disposal and heeding professional advice from financial planners. Odds are good that a Roth IRA may be right for you.
What is a Roth IRA?
As noted by the financial experts at SoFi Invest, “An IRA lets you invest your savings so that your money will hopefully grow over time into a healthy nest egg.” A Roth IRA is a specific type of IRA.
The tax benefit for a Roth IRA comes on the withdrawal. Your contributions are made after taxes, so you still pay taxes on the contributions – but not the withdrawal.
However, there are contribution limits on a Roth IRA. In 2020, you could contribute up to $6,000 annually, or $12,000 if you are married.
You can add an extra $1,000 if you are 50 or older. However, there are income limits: You could be making no more than $122,000 if you are single. For married couples, that number increases to $196,000.
It is also worth noting that you can withdraw this money at any time, with no tax payment.
How Do They Work
A Roth IRA can take the form of any investment vehicle. Furthermore, they are self-directed. This means they can be invested in almost anything, including stocks, bonds, mutual funds, ETFs, and more.
They can also be invested back into company stock, and this is sometimes an employee benefit offered by certain companies.
However, there are some restrictions on where Roth IRAs can be invested. They cannot be invested in derivatives, antiques, life insurance, or most types of coins.
How Do You Contribute to Them
Contributions to a Roth IRA can be done in multiple ways. First, you obviously determine how much money you want to invest in the Roth IRA. From there, you can set up an IRA to make deductions directly from your bank account at any time.
Just make sure that the money being withdrawn is earned income, as this is the only type of investment you can make into a Roth IRA. You can also write a check at any point to your investment firm.
How to Open One
Fortunately, opening an IRA is not hard at all. Your best bet is to find a financial planner with whom you are comfortable.
This planner can find an IRA that works for you. They will do a comprehensive inventory of your personal financial situation and determine your replacement income necessary, your tax situation, and your overall risk tolerance.
From there, they will make a series of investment recommendations, and this will likely include an IRA.
Alternatively, you can find an IRA on your own, and make investments by simply opening an account. If you are comfortable doing so, this is simply a matter of finding an IRA that has high performance and low fees.
Remember, fees are critical, as any fees removed from your IRA for investment purposes cannot be reinvested, thus costing you some potential compound growth.
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