What Exactly is a Roth IRA and Why Do I Need One?

TODAY I ASKED YOU GUYS IN AN INSTAGRAM Q&A WHAT TOPICS YOU’D LIKE TO SEE IN MY “FUN” NEW SEGMENT – LIFE MADE EASY WITH ERIN. I’M USING THE TERM FUN VERY LOOSELY BECAUSE I KNOW THE TERM ROTH IRA MAKES MOST PEOPLE GLAZE OVER BEFORE EVEN FINISHING THE SENTENCE.

SO WHO THE F*CK IS THIS IRA EVERYONE TALKS ABOUT AND WHY DO I NEED HIS ROTH-ING?

WTF IS A ROTH IRA ANYWAY?

WARNING: I MIGHT USE A FEW MORE F BOMBS & MY EXPLANATION OF FINANCIAL TERMS IS GOING TO BE LESS LIKE AN ACTUAL FINANCE LESSON AND MORE LIKE YOUR DRUG DEALER COUSIN EXPLAINING HOW TO CONVERT GRAMS TO OUNCES.

I’M GOING TO EXPLAIN THIS STUFF THE WAY I HAD TO EXPLAIN IT TO MYSELF IN COLLEGE. TOWARDS THE END OF MY COLLEGE CAREER, I TRANSITIONED INTO ONE OF THE FEW ONLINE EDUCATION PROGRAMS AT THE TIME (REALLY AGING MYSELF).

SOMEHOW, I MANAGED TO TEACH MYSELF FINANCIAL ACCOUNTING IN MY BEDROOM AT 2 AM. IT WASN’T EASY, BUT I MADE IT OUT ALIVE. AND NOW I’M HERE TO HELP YOU – WE’RE GOING TO TALK ABOUT THOSE ADULTING TOPICS THAT SOUND LIKE SOMETHING YOU NEED A GLASS OF SCOTCH AND A CIGAR TO UNDERSTAND.

TO PUT IT REALLY SIMPLY: A ROTH IRA IS A TYPE OF RETIREMENT ACCOUNT.

LET’S JUST PAUSE AND TAKE A SECOND. BREATHE.

OK, SO NOW YOU KNOW A ROTH IRA IS TYPE OF ACCOUNT MEANT FOR RETIREMENT, WE CAN DIG IN A LITTLE DEEPER.

IT’S A TYPE OF RETIREMENT INVESTMENT ACCOUNT THAT HAS A LOT OF TAX BENEFITS. TAX BENEFITS ARE GOOD, RIGHT? WE LOVE PAYING LESS MONEY IN TAXES.

IT’S ALSO A RETIREMENT ACCOUNT FOR INDIVIDUALS… WHICH IS WHERE THE TERM “IRA’ COMES FROM. INDIVIDUAL RETIREMENT ACCOUNT. THE FIRST LETTERS ARE IRA! LOOK AT THAT! SO THE TERM IRA IS JUST REFERRING TO THE FACT THAT IT’S A TYPE OF RETIREMENT SAVINGS ACCOUNT A PERSON CAN HAVE.

IF THAT’S NOT MAKING SENSE… THINK OF IT LIKE THIS, IRA IS THE NAME OF A PERSON. AND HE CAN GO OUT AND GET HIS OWN SAVINGS ACCOUNT FOR WHEN HE RETIRES. WHEREAS A 401K (ANOTHER TYPE OF SAVINGS ACCOUNT) IS OFFERED BY AN EMPLOYER – MEANING IT’S SOMETHING YOU WOULD GET FROM YOUR JOB. BUT THAT’S A WHOLE SEPARATE POST BECAUSE WE’RE NOT TRYING TO GET TOO WILD ALL AT ONCE.

SO WE KNOW WHO IRA IS NOW, WHAT IS THIS ROTH BUSINESS?

ROTH REFERS TO THE TYPE OF IRA IT IS. YES, THERE ARE DIFFERENT TYPES OF IRA ACCOUNTS. AND NO WE DON’T NEED TO DIVE INTO THEM. THE EASIEST WAY TO LOOK AT IT IS BY COMPARING A ROTH IRA TO A TRADITIONAL IRA.

THE MAIN DIFFERENCE IS HOW THEY’RE TAXED. AND WE CAN DIVE INTO THE TAX PART OF THE ROTH IRA AFTER THE JUMP. AND RATHER THAN TURNING THIS INTO A GIANT NOVEL, I’M JUST GOING TO BREAK DOWN SOME FACTS, PROS & CONS.

SIMPLE ROTH IRA FACTS

AKA THE HIGHLIGHT REEL:

• YOU PUT MONEY INTO THE ACCOUNT YOU’VE ALREADY PAID TAXES ON.
• THAT MONEY GROWS OVER TIME
• AFTER YOU RETIRE, YOU CAN WITHDRAW THAT MONEY AND DON’T HAVE TO PAY MORE TAXES ON..
• YOU CAN ONLY ADD CASH TO YOUR ROTH IRA (CHECKS & MONEY ORDERS WORK TOO).
• ANYONE CAN OPEN A ROTH IRA.
• IT’S HELPFUL TO LOOK AT THE ACCOUNT AS A SHELTER (I LIKE TO THINK OF A BOX). THAT BOX PROTECTS YOU FROM TAXES. INSIDE OF THAT BOX, YOU CAN DO WHATEVER YOU WANT WITH THAT MONEY & INVEST IT INTO DIFFERENT THINGS.
• THAT MONEY STAYS IN THE ACCOUNT UNTIL YOU RETIRE, THEN YOU CAN START USING IT.
• YOU CAN PULL MONEY OUT THAT YOU’VE ADDED (CONTRIBUTED) ANY TIME WITHOUT PAYING PENALTIES. BUT YOU WILL BE CHARGED A FEE IF YOU TAKE OUT ANY EARNINGS. MEANING, IF YOU ADDED $100 TO THE ACCOUNT, YOU CAN PULL THAT $100 ANY TIME. BUT IF YOU INVESTED IT AND IT TURNED INTO $150, YOU WOULD BE CHARGED A PENALTY ON TAKING OUT THE EXTRA $50.
• HERE’S WHERE IT MIGHT START SOUNDING A LITTLE MORE CONFUSING… A ROTH IRA ISN’T JUST AN ACCOUNT YOU LET YOUR MONEY SIT IN. A ROTH IRA ISN’T AN INVESTMENT AND IT DOESN’T EARN MONEY. BUT, THE MONEY WITHIN THE ACCOUNT CAN BE INVESTED.
• THINK OF A ROTH IRA AS A SHOPPING CART. IT’S BASICALLY JUST AN EMPTY BASKET UNTIL YOU FILL IT UP. AND IT’S YOU’RE JOB TO FILL THAT BASKET UP WITH INVESTMENTS.
• THERE ARE DIFFERENT TYPES OF INVESTMENTS – SAFE AND RISKY – SAFE TEND TO HAVE LOWER REWARD POTENTIAL AND RISKY HAVE HIGHER REWARD (AND LOSS) POTENTIAL. THE GENERAL GOAL IS TO HAVE AN ASSORTMENT OF INVESTMENTS TO BALANCE EACH OTHER OUT.

PROS:

• THE MONEY YOU INVEST GROWS TAX FREE.
• THEY’RE LESS RESTRICTIVE THAN OTHER ACCOUNTS.
• YOU CAN HAVE THE ACCOUNT FOR AS LONG AS YOU WANT.
• THEY’RE HELPFUL IF YOU’RE A “YOUNG SAVER” – MEANING YOU MIGHT NOT BE IN YOUR PEAK EARNING YEARS AND HAVE TIME FOR THAT TAX FREE GROWTH TO PAY OFF.
• THERE ARE NO REQUIRED MONTHLY DISTRIBUTIONS (UNLIKE OTHER TYPES OR RETIREMENT ACCOUNTS). SO WHEN YOU FINALLY RETIRE, YOU DON’T HAVE TO WITHDRAW A CERTAIN AMOUNT. YOU CAN JUST LEAVE THEM IN THERE AND CAN EVEN ADD MORE.

CONS:

• THE IRS LIMITS HOW MUCH MONEY YOU CAN ADD TO YOUR ROTH IRA EVERY YEAR.
• SINCE IT’S A RETIREMENT ACCOUNT, YOU CANT WITHDRAW YOUR EARNINGS UNTIL YOU’RE 59.5 YEARS OLD (AKA THE RETIREMENT AGE).
• IF YOU WITHDRAW ANY EARNINGS BEFORE YOU TURN 59.5, YOU HAVE TO PAY A PENALTY ON THE AMOUNT YOU TAKE OUT (10%). MEANING, IT’S BEST TO LEAVE IT ALL IN THERE & IS A LONG TERM SAVINGS PLAN.
• THERE IS A MAXIMUM AMOUNT YOU CAN ADD TO THE ACCOUNT EVERY YEAR. THE AMOUNT IS AFFECTED BY HOW MUCH MONEY YOU EARN. BUT BASICALLY, YOU CAN’T ADD MORE THAN $6500 A YEAR IF YOU’RE UNDER 49 YEARS OLD.
• YOU HAVE TO SET IT UP YOURSELF.
• THERE ARE INCOME LIMITS — MEANING YOU CAN TECHNICALLY MAKE TOO MUCH TO HAVE ONE

MY PERSONAL 2 CENTS

I THINK ROTH IRA ACCOUNTS ARE A GREAT WAY TO START SAVING MONEY. BUT THEY SHOULD BE LOOKED AT AS AN ENTIRELY DIFFERENT TYPE OF SAVINGS THAN YOUR STANDARD RAINY DAY FUND.

YOU SHOULD HAVE SEPARATE SAVINGS FOR “LIFE” – AKA THE JUST IN CASE STUFF. YOU DON’T WANT TO HAVE TO TAKE MONEY OUT OF YOUR ROTH IRA BECAUSE OF A FLAT TIRE BECAUSE YOU’LL HAVE TO PAY A FEE. YOU ALSO WANT TO HAVE A SEPARATE SAVINGS FOR BIGGER LONG TERM GOALS LIKE BUYING A HOUSE.

ROTH IRA ACCOUNTS ARE A GREAT OPTION IF YOU’RE IN A LOWER TAX BRACKET RIGHT NOW BUT THINK YOU MIGHT MAKE MORE MONEY AS TIME GOES ON. I MEAN, THAT’S ALWAYS THE GOAL, RIGHT? IF YOU’RE CURRENTLY IN ONE OF THE HIGHER TAX BRACKETS, A ROTH IRA MIGHT NOT BE THE BEST OPTION.

I LIKE THAT YOU CAN HAVE A ROTH IRA AND START SAVING MONEY FOR RETIREMENT, EVEN IF YOU DON’T MAKE A CRAZY AMOUNT OF MONEY. THERE AREN’T ANY MINIMUMS (AND AS YOU MIGHT REMEMBER THERE ARE ACTUALLY MAXIMUMS) – SO YOU DON’T HAVE TO STRESS ABOUT ADDING A SPECIFIC AMOUNT TO KEEP THE ACCOUNT.

THERE ARE OTHER TYPES OF SAVINGS AND RETIREMENT ACCOUNTS WE CAN DIVE INTO LATER – YOU’RE NOT LIMITED TO JUST ONE TYPE OF SAVINGS ACCOUNT & AS TIME GOES ON IT’S ACTUALLY GOOD TO HAVE DIFFERENT TYPES TO COVER DIFFERENT AREAS!

SINCE THE GOAL OF A ROTH IRA IS TO SAVE & EARN MONEY FOR WHEN YOU RETIRE, YOU HAVE TO ACTUALLY OPEN AN ACCOUNT. WHILE YOU CAN TECHNICALLY DO THIS AT A BANK, I RECOMMEND USING AN ONLINE BROKER OR A BROKERAGE FIRM BECAUSE THEY HAVE HIGHER YIELDS (MORE MONEY YOU CAN MAKE).

THE QUESTIONS OF WHAT ACCOUNT TO OPEN, WHERE, WHAT TO INVEST, ETC ARE ALL PRETTY DETAILED, SO I’M GOING TO STOP HERE & HOPE THAT AT LEAST WE FIGURED OUT WHO IRA & WHAT HIS ROTHING IS UP TO TODAY.

IF YOU’RE READING THIS AND WANT TO GET STARTED, YOU’RE MOST LIKELY NOT READY TO DUST OFF YOUR WALL STREET BLAZER & BECOME A HANDS ON INVESTOR OVERNIGHT. THAT’S NOT TO SAY YOU CAN’T LEARN OR EVENTUALLY GET MORE INVOLVED! BUT FOR NOW, YOU’RE PROBABLY JUST LOOKING FOR SOMETHING EASY THAT KIND OF HELPS YOU SAVE ON AUTOPILOT.

I RECOMMEND STARTING HERE ON ACORNS – THEY EVEN GIVE YOU $5 WHEN YOU OPEN THE ACCOUNT! I’M HAPPY TO DIVE INTO WHY I LIKE THE SITE MORE ON ANOTHER POST IF YOU GUYS WANT TOO!

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