Dear Determined Wealth-Builder, Have you ever wondered…What is a Roth IRA? Perhaps you have never even heard of it before. Today, that’s what I am going to discuss. But first, thanks for dropping by. I have a goal to teach financial literacy to young people under the age of 30. Your reading this helps me with that goal. Thank you!
What is a Roth IRA?
A Roth IRA is a retirement account. The full name is Roth Independent Retirement Account. The funding comes from after-tax contributions. The account owner invests the money inside the account. Then you pay no taxes on qualified withdrawals.
What are after-tax contributions?
After-tax contributions is money put into a retirement account (or taxable account) that comes from income that has already been taxed.
What is the difference between a Roth IRA contribution and other after-tax contributions?
The difference between a Roth contribution and other after-tax contributions is that income earned on money in a Roth IRA will not be taxed when pulled out in retirement, while money earned on other after-tax contributions, such as in a taxable stock account, are taxed.
What is the benefit of a Roth IRA?
The benefits of a Roth IRA include:
- Your earnings grow tax free.
- You pay no taxes on qualified withdrawals.
- There are no required withdrawals (like with other retirement accounts, such as 401K and traditional IRAs.)
- You can contribute at any age (as long as you have some qualifying earned income.)
- Your heirs can inherit your Roth IRA tax-free (unlike many other inheritances.)
- You can withdraw contributions tax-free and penalty-free at any time (Specifically, this applies to contributions only, not earnings.)
How Do I Start a Roth IRA?
You will need to do the following to start a Roth IRA:
- Decide where you want to start your after-tax retirement account. (You can open the account online.)
- Be prepared to share your personal information (such as name, address, social security number, etc.)
- Be prepared to share your employment information.
- Be prepared to connect a bank account to use to transfer money into your retirement account (with information such as your account number and your bank’s routing number. )
- Be prepared to provide information on who you want to inherit your account (such as names and birth dates.)
How much does it cost to open a Roth IRA account?
Opening a Roth IRA doesn’t cost any money. But, you need money to fund your account. For 2023, you may fund your account up to $6,500 per year.
This amount may change each year, so check each year for the maximum contribution for the year.
How Much Money Do I Need to Start a Roth IRA?
There is no minimum amount needed to start a Roth IRA. However, the IRS sets a maximum amount that you may contribute each year. For 2023, the maximum that anyone may contribute is $6500, if you are under age 50. If you are age 50 or older, the maximum that you can contribute is $7500. However, the amount that a specific individual may contribute is based on their income level. If you are a single tax filer and make under $138,000 MAGI, then you may contribute the maximum amount. Likewise, if you are married filing jointly earning up to $218,000 MAGI, you may contribute up to the maximum amount. But, check with a qualified tax advisor before starting any retirment account or making any other investments.
Can I Open a Roth IRA by Myself?
Yes, you can open a Roth IRA by yourself, relatively easily. You can open one at a local bank or an online bank. You can open one at a brokerage house, if you want to be able to invest in stocks in your retirement account. The brokerage accounts can be opened online, also.
Where Are Some Places That I Can Open a Roth IRA?
You can open a Roth IRA at most banks and investment (brokerage) houses. These can be opened either in person or online.
How Does Money Grow In a Roth IRA?
How money in a Roth IRA grows depends on the assets that you put into the account. Money in these accounts can grow through compounding. The compounding can be with interest or dividends. These accounts can also grow through the increase in value of an asset in the account. For instance, if you bought some stocks at $20 a share in your account, and then the stock share price grew to $100 per share, that would be an increase in value of the assets.
Key Takeaways About Roth IRAs
- A Roth IRA is a retirement account .
- They are funded using after-tax dollars.
- Income earned in these accounts grows tax-free if left in the required amount of time.
- It is easy to open a Roth IRA. Methods include online or in person through a bank or through an investment house.
- The maximum amount that any individual under tha age of 50 can contribute to a this type of account in 2023 is $6500. It’s $7500 for those age 50 and over.
- Check with a qualified financial advisor to verify the maximum amount that you may contribute each year,
Do you want to learn more about this subject? Check out:
What is the Best Retirement Account?
Do you want to read more about how to build your wealth? Check out:
Earn As Much Interest As Possible
Start Creating Passive Income Today
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Hugs and Keep Building Your Financial Literacy,
Rich Mom
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Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
The information shared here is not intended as financial advice, just encouragement.
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