Why You Need a Roth IRA
A lot of ink has been shed on the relative superiority of Roth’s IRAs over traditional IRAs, but let’s take another look at how Roth, which NerdWallet called “the golden child of the retirement planning world,” turns 20.
The key difference between a Roth IRA (Individual Retirement Account) and a traditional IRA is that you are taxed on contributions: with the Roth IRA, you deposit money that is already taxed, so when you withdraw at a later age (age 59½) you do not have to pay tax on contributions or income. It’s like paying taxes in advance.
As I wrote earlier , Roths are looking more attractive nowadays than ever. Tax rates are likely to be as low as they will be for a long time, thanks to the recently passed GOP tax bill. Basically, you are putting money into a tax category that is likely lower than what you will be in the future, so you set a lower rate. While this has always made Roths an attractive vehicle for young workers (who tend to rank lower than more experienced workers), it now works for many other people as well.
Another important benefit is that there is no early withdrawal penalty if you withdraw the principal of your deposited money (not the interest earned), making it sort of a reserve fund in case of an emergency. This is a really important difference from other accounts, like your 401 (k) or traditional IRA, and is useful in an era when savings of any kind are stretched out and one medical bill or unexpected expense can tempt people to take advantage of another’s retirement. accounts that are subject to a fine.
There is no minimum allocation requirement, meaning your children can inherit your Roth — whereas traditional IRAs require a minimum allocation starting at age 70½ — and you can use Roth to complement your 529 plan.
Disadvantage: The amount you can deposit starts to decrease if you make $ 120,000 a year for an individual in 2018, or $ 189,000 if you are married and file taxes jointly and stop working entirely from $ 135,000 for individuals individuals and $ 199,000 for couples.
How to open a Roth IRA
If you have 401 (k) sourced through your employer , make an absolute contribution prior to the match, then consider channeling a portion of your salary to a Roth account (current cap is $ 5,500 per year and $ 6,500 per year if you 50 or older), especially if you work for a company that offers a limited number of 401 (k) investment options.
To open an account, you need to choose a brokerage company, bank or robot advisor. Here are a few questions to ask yourself when opening one of the RothIRA.com sites :
- Is there a fee to open or maintain it?
- Does it offer you the customer service you like, whether online or over the phone?
- Does the company offer the types of investments you need, be it ETFs, fixed-date funds, actively managed funds, or stocks and bonds?
- How much does it cost to trade? This is especially important if you plan to buy and sell frequently in your account.
If you decide to contact a brokerage company (such as Fidelity or Merrill Edge), here are some other things to consider when proposing accounts for NerdWallet :
- Has low or no fees.
- Offers a large selection of no-transaction mutual funds and no-fee ETFs.
- Provides quality customer service and investor education, especially if you are new to investing.
- Having a low minimum on the account and a low minimum of the fund are two different things. We do not like it when you choose an online broker because it does not have an initial minimum deposit, and later you will realize that most of the funds you want to invest in require $ 1000 or more. Chances are, your money should remain in cash until you have accumulated enough to keep the buy-in at the minimum level.
Then you choose what you want to invest in, which can be individual stocks and bonds or mutual funds (or sometimes other investments like options). You can also opt for a set date fund or ask the consultant to make the choice for you, but you will pay more for both of these options. If you don’t go with a target date or an actively managed fund, you’ll want to choose a mix of index funds and ETFs to invest in – trading individual stocks will become costly and you won’t be able to outperform the market. As NerdWallet suggests , if you are unsure of what to do but do not want to pay an additional fee to the advisor, you can simulate the display of robots portfolios on their websites.
Once you’ve decided on your asset allocation, don’t forget to automate your deposits so that you fund your account constantly, but never go over the $ 5,500 limit. Then: enjoy your tax-free income.