What is a Roth IRA? A Beginners Guide

What is a Roth IRA? A Beginners Guide

Money has a direct impact on our everyday lives, yet we somehow tend to overlook the importance of it. In order to have success in your financial life, you need to plan for the future.

Whether you like it or not, you are eventually going to be an old man, and are going to have to live off retirement money. Time moves fast, so this is why opening a Roth IRA is important.

Learning exactly what an IRA is and how to maximize your money will give you more opportunity to achieve financial freedom.

How a ROTH IRA Works

A Roth IRA, is an individual retirement account that has tax-free earnings growth and tax-free distributions.

Due to these tax-free incentives, a Roth IRA is a great way to invest your money and build wealth. Once retirement rolls around, can be financially independent.

Essentially, the money you contribute to your Roth is from your earned income which has already been taxed. However, your contributions can grow and continue to compound tax-free, so when you go to withdraw your money, you will pay no taxes on your earnings.

Keep in mind that a ROTH IRA is meant for long term investing, so if you're looking to make money trading this isn't the account for you.

A ROTH IRA is a great account for almost everybody, especially for someone who does not have a 401k plan from their employer.

How Much Can I Contribute to my Roth IRA

As long as you meet the income limit, then you are able to open a ROTH IRA.

Along with this, yes there are also limits on how much you can contribute to your IRA as well.

Filing Status 2021 Income 2022 Income Max Contribution
Single, head of household or married filing separately Less than $125,000 Less than $129,000 $6,000 ($7,000 if 50 or older)
$125,000 up to $140,000 $129,000 up to $144,000 Contribution is reduced
$140,000 or more $144,000 or more No Contribution Allowed
Married filing jointly or qualifying widow Less than $198,000 Less than $204,000 $6,000 ($7,000 if 50 or older)
$198,000 up to $208,000 $204,000 up to $214,000 Contribution is reduced
$208,000 or more $214,000 or more No contribution allowed
Married filing separately (if you lived with spouse at any time during year) Less than $10,000 Less than $10,000 Contribution is reduced
$10,000 or more $10,000 or more No Contribution Allowed
Info from IRS

As of 2021, the contribution limit for an IRA is $6,000 a year from your taxable income.

However, if you are 50 years old or older, you are allowed to contribute up to $7,000. In addition to this, there is no minimum requirement a year for your IRA.


What Investments are in a Roth IRA?

Some of the most common assets purchased in a ROTH IRA are stocks, bonds, ETFs, and mutual funds.

Stocks: a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called "shares."

Bonds: A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower

ETFs: An exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can.

Mutual Fund: A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.

(Definitions via Investopedia)

Who Manages the Roth IRA?

Wealth planning is very important, so who you decide to let manage your money is paramount for your retirement.

You are able to choose what types of investments you want in your IRA, however, brokerages will give you advice and guidance by providing a Financial Advisor to help you with your choices.

By law, all IRA's are required to have a custodian that has been approved by the IRS. This is usually either a brokerage company, an insurance company, or a bank.

Brokerage firms are the most common because they offer the widest range of investments and financial planners. They will ask you a number of questions, including your risk tolerance and investment preferences.

Contributions for a tax year must be made by the IRA owner’s tax-filing deadline, which is generally April 15 of the following year.

I recommend looking for a brokerage with low trading and maintenance fees, that way you can maximize your gains within your portfolio.

How to Maximize Your Roth IRA

Invest Early

The sooner you begin, the more money you will be able to contribute towards your future. That money will be able to compound and create even more money to purchase even more assets. Make sure you are always maxing out your yearly contributions as well.

The only way you will be successful is by getting your skin in the game. Investing can be scary, but it is necessary if you want financial freedom. Don't be afraid to start.

Think Long Term

A Roth IRA is for long term investing. Yes, you can actively trade within the account, however, you don't want to be too risky. You want to invest in assets that have a promising future and you believe will be around for a long time.

Keep in mind that there will be highs and lows in the market. Some people look at their portfolio everyday, but I don't recommend that. It's better to look at it every 6 months.

It is important to keep a level head, even when it seems like the market is taking a beating. Remember, the earlier you start, the more opportunity you have to grow. So just start.

Do Your Research

You need to consider your investing knowledge and current experience. Don't be afraid to ask your advisor questions; that is why they are there.

Stay away from the latest trends, and always do your research on the companies you are investing in. It is also a good idea to have some diversification within your portfolio. This reduces the risk of serious loss if one of your investments isn't performing well.

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