The quietest way to set yourself up for retirement is through the Roth IRA. Roth IRAs don’t get lots of press and aren’t the most exciting option available, but in a few years when you can take money out without paying federal taxes, you may think you made a good decision.
Stashing cash in a drawer or leaving it in a bank account might feel comfortable but won’t help your money grow. Because inflation steadily devalues your savings while they are sitting idle, and you’ll earn minimal growth on your investments. Therefore, using the wrong method causes you to lose time and limit your potential to save for retirement.
On a similar note, retirement really begins when you stop spending every dollar that comes in; therefore, once you have decided to invest for retirement, it’s time to determine where you will invest your earnings while they generate earnings!
A Roth Individual Retirement Account (IRA) is an individual retirement account that offers the potential to invest for the future. A Roth IRA allows you to invest in assets other than just cash; you can also invest in stocks, bonds, funds, etc., which are likely to appreciate in value over a period of time. Think of it as upgrading your financial tools from a hand tools to power tools.
The greatest advantage of the Roth IRA is that once you retire, you can withdraw your investments tax-free. Therefore, all the money you take out of the account, including any appreciation that occurred during your working years, will not be taxable as income or capital gains. You won’t have to worry about paying taxes on this money, and you will not risk having to discuss taxes with the IRS.
However, as with anything that has significant benefits, there are rules associated with a Roth IRA. Specifically, there are no tax deductions available to you when you first make a contribution to a Roth IRA; rather, you will pay your taxes on the money before depositing it to the account, and then allow the account to continue growing for many years without paying additional taxes until you retire. This is the reverse of the traditional IRA, where you postpone paying income and capital gains taxes until after you retire.
Unless you have a pool of money constantly flowing into your Roth IRA, there are limits on the dollar amount you can contribute to your account every year. These limits are adjusted periodically. The same goes for income limits; once you exceed those, you will be no longer able to add to your account (unless you know some clever tricks). For many people, however, the doors are wide open!
Another part of this strategy that a lot of people do not know about is that you can withdraw any of the contributions that you have made personally to your Roth IRA, penalty free, whenever you would like. However, if you were to withdraw any of the earnings before you reached age 59 1/2, you would incur tax penalties. In other words, if you have patience, your account will reward you.
If you set up your Roth IRA at a bank or credit union, you will only have access to very limited investment options (primarily low-yielding options). If you establish your Roth IRA with an online brokerage, however, you will have access to all types of investments and will be able to create your own portfolio. The accounts themselves are the same, but the potential of the accounts is vastly different.
Planning for retirement does not require any complicated calculations or investments; planning is simply setting yourself up to succeed by default and using the natural power of time.
A Roth IRA serves many purposes, in addition to being a retirement account. It is also a long-term tax strategy, a way to grow your money, and a tool to help you manage your future stress levels. Simply begin saving early, and keep doing so on a regular basis, and eventually you will realize the ease that comes with this simple, yet effective, financial decision making.
