Why Roth IRAs?

With fewer available sources of guaranteed income in retirement (social security & pensions), planning for your retirement can be daunting for anyone, especially young investors. A Roth IRA is the perfect investment opportunity for for young investors.
I get asked all the time:

  • When should I start saving? Now!
  • How should I start saving? Consider the Roth IRA.

Here a few other questions and concepts I frequently answer and discuss…..

What is a Roth IRA?

Let’s start with the basics. The easiest way to visualize IRAs, whether they are Traditional or Roth, is to imagine them as a tax-advantaged wrapper. Once you establish your wrapper you can decide what investments to place inside (Stocks, ETFs, Mutual Funds, etc.). A Roth IRA is used to invest after-tax money (money you receive in your paycheck). That money grows tax-deferred and when you make a qualified distribution in retirement, you receive the money tax-free (including the growth above what you invested!). There is a phase out for Roth IRAs which means you are not allowed to contribute or have to make contributions less than the max if your make a certain amount of income.

The income-based limits are based on your modified adjusted gross income (MAGI) and are different dependent on your tax-filing status. The limits can easily be found by doing a google search, but they usually do not affect young investors because they are pretty high. Another nice advantage of Roth IRAs is that required minimum distributions (RMDs) are not required. This mean, under current rules, that you will not be forced to take certain distributions when you’re 70 ½ years old and can continue to let the money grow if you’d like.

What makes a Roth IRA distribution qualified?

There are two basic rules you must comply with to make sure your distribution is received tax-free.

  • First, you must be at least 59 ½ years old.
  • Second, you must have established a funded Roth IRA for at least 5 years. This is another reason it is important to open a Roth IRA sooner rather than later.

Why are Roth IRAs a good idea for young investors?

When you are younger, you are just starting your career and will find yourself in a lower tax bracket most of the time. Since you are making the investment with after-tax money you are paying taxes now (hopefully in a lower tax bracket than the future) and receiving the benefits tax-free in retirement where you will most likely be in a higher tax bracket.

The number one question to ask yourself before deciding to invest in a Roth IRA over a Traditional IRA is, “Do I believe I will be in a higher tax bracket now or when I take a distribution?”. Another reason a Roth can be useful for young investors is that you always have access to the money you contributed with no penalties or tax consequences. If you invest $10,000 and it grows to $15,000, you can take $10,000 back at anytime no matter what age you are. This makes for a great emergency fund if an unexpected expense may arrive.

How to open a Roth IRA?

Taking the steps to open and fund a Roth IRA can be fairly simple. First, go to the website of your custodian of choice (Fidelity, Robinhood, or TD Ameritrade to name a few) and set up your Roth IRA. The application will ask for your personal information and usually a little bit about your investment experience as well.

Once you set the account up, you are ready to contribute money. I suggest setting up an Electronic Funds Transfer (EFT) form which will allow you to connect the Roth IRA account to your bank account. You can also set up automatic, ongoing contributions which I highly suggest. For example, you can set it up so that $100 is contributed every two weeks when you get paid. This way, you continue to invest and won’t even miss the money coming out of your paycheck after a while.

Once the money is in your account you can invest in whatever you choose. At the end of the tax year (April 15th), I decide if I have the extra funds to max out my contribution for the year (currently $5,500 if you are under 50 years old). If you have any questions or concerns, feel free to reach out to me. I am always happy to help.


About the Author:

Joe Rudnicki, CRPC

Joe Rudnicki is a CHARTERED RETIREMENT PLANNING COUNSELOR™ and a Wealth Advisor at Strategic Wealth Partners. He provides proactive and comprehensive wealth management solutions to affluent families and entrepreneurs. Joe works with clients who have outgrown cookie-cutter advice to provide them with custom-tailored solutions to optimize their financial affairs. Joe holds a B.A. from the University of Akron in Business Administration. He started at SWP in 2014 as a planning analyst. Preferring to be client-facing rather than back-office focused, Joe transitioned to be a Wealth Advisor so he could help clients realize all that was important to them. His highly competitive nature has allowed him to keep a winning score card and provide happiness and success for our clients.

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