Do you want to start investing but you aren’t sure what to do first? Open a Roth IRA!
There’s a ton of investing advice out there, and your investment strategy really depends on your goals. As a young investor, a Roth IRA is the best investment account to start RIGHT NOW to jump start your investment strategy and maximize your earning potential.
A Roth IRA account allows you to grow your money tax free over a long time period (like 20-40 years) and still have flexibility to use your money sooner if absolutely necessary. In this article I’ll walk you through the basics of Roth IRAs, including:
What is a Roth IRA:
A Roth IRA is a type of investment account. There are lots of different investment account types available (like a brokerage account, 529 Plan, 401k, traditional IRA, etc.) and this is just one option.
The investment account type determines how and when the money can be used; while within the account itself is where you choose your investments and make your money (stocks, bonds, etc).
Roth = No taxes when you withdraw your money
In a Roth IRA, the money that you contribute has already been taxed so you may hear it referred to as an after-tax or tax-exempt account. This is important because you can earn more in the long run since you don’t have to worry about taxes when you withdraw your money later in life.
IRA = Individual Retirement Account
The term “individual” means that this account is not dependent on any employer, so you can keep investing regardless of who signs your checks (or if you are self employed). The retirement portion refers to when and how you can withdraw your money. For a Roth IRA account, you can start withdrawing your money for any reason once you reach age 59 ½. There are also ways to withdraw it earlier if needed.
Recap: A Roth IRA is a type of investment account that lets you grow your money over a long period of time without having to worry about taxes or employers.
Who is eligible?
Eligibility is determined by your income and your tax filing status. For tax year 2021, anyone who has earned income (money from a job or self-employment) and makes less than $125,000 a year can contribute to a Roth IRA. This includes most young investors. If you’re married or make over 125k, check out the IRS eligibility guidelines here.
If you meet the eligibility requirements and you’re under age 50, then you can contribute up to $6,000 this year. If you’re 50 or older, you can contribute up to $7,000.
Top Roth IRA Benefits:
I love Roth IRAs because I think they offer the most benefits for individual investors. Here’s an overview of the top benefits:
Tax-free Earnings:
Since you’ve already paid taxes on the money you’re investing, you don’t have to worry about paying taxes later. THIS IS AWESOME. Really really awesome. You will make more money in the long run with this account compared to a pre-tax account like a traditional IRA.
You’re In Control:
You have the freedom to pursue whatever employment options you want: self employment, international work, consulting, etc. This is an individual account so you don’t have to rely on an employer for your retirement income.
Penalty Free Early Withdrawals:
You can withdraw your contributions at any time, without penalty. This is huge. You don’t have to wait until age 59 ½ if you need access to your money. While I don’t recommend doing this unless absolutely necessary, the Roth IRA can also be used as an emergency fund.
You can also withdraw your earnings penalty free after 5 years for specific reasons. Usually there’s a penalty for withdrawing earnings early, but with a Roth IRA there are exceptions like a first time home purchase, education expenses, or birth and adoption expenses.
How and Where to Open your Roth IRA:
There are a lot of companies that offer Roth IRA accounts. The best Roth IRA providers offer a wide range of investment options and low-fee funds, which is why I recommend using a large online brokerage provider. This allows you to manage your investments yourself instead of using a robo advisor or financial advisor that will charge you high fees for their services.
You can and should manage your investments yourself. You don’t have to become an investment professional to gain the knowledge that you need to make good decisions and earn great returns from your investments. Additionally, managing your account yourself will pay off in the long run by saving you thousands of dollars in fees.
My two favorite brokerage companies:
- Vanguard: The best option if you have at least $1,000 to invest right now.
- Vanguard is a market leader and has consistently offered low-fee funds with great returns. This is where I have my Roth IRA. There is a $1,000 minimum to buy into their funds
- Fidelity: The best option without minimum investment amounts.
- Fidelity is a great option for investors who can’t meet the $1,000 minimum. This company also offers great low-fee investment options and consistent returns. If you don’t have $1,000 right away, open an account at Fidelity. You can always move your money from Fidelity to Vanguard once there’s a $1,000 account balance.
Open Your Roth IRA
Alright, so you’re either investing with Vanguard or Fidelity – that’s great. Now you need to navigate to the website, and select “Open Roth IRA.” Here are the links and instructions:
Choose “Open Your Retirement Account” and complete the questions. When asked Why are you investing, select “Retirement” and then “Roth IRA.”
Select “Open Roth IRA”
Next, connect your bank account to your new Roth IRA. This will be used to fund your account and set up automatic monthly investments later. If you choose Vanguard, you need to transfer at least $1,000 into the account now. If you choose Fidelity, transfer any amount that you’re comfortable with. Try to start with at least $50.
It will take a few days for your initial contribution to show up in your Roth IRA. Once your initial contribution is available, make sure you choose your investments. You can choose multiple investments or one target date fund. A target date fund is the best low cost, hands off option for long term investing. More info to come on this in future posts. For now, reach out to me via my contact page if you need help choosing your target date fund.
I hope this article helps you understand the basics of a Roth IRA account and why you should open one right now. If you have any questions, let me know in the comments!
Disclaimer: I am not a certified financial advisor and this article is intended for educational purposes only.