One of the most powerful retirement accounts is the Roth IRA. Here is how it works:

The Roth IRA is a retirement account in the United States which allows you to invest into the stock market with certain tax benefits.

Who is allowed to open up a Roth IRA?

To open a Roth IRA, you must have earned income in a given tax year, as long as they don’t earn too much. The income limits all depend on how you file taxes, so below is the points where income limits start to lower the maximum you can put into your Roth IRA (for 2024).

But don’t worry if you earn too much, there is a legal way around this (more on how to do this below).

Where can you open a Roth IRA at?

Pretty much any investment company allows you to open a Roth IRA. Fidelity, Vanguard, Betterment, Charles Schwab. It is a very simple process. When creating the account, you have to select “Roth IRA” so you get the tax benefits.

What are the tax benefits of a Roth IRA?

“IRA“ stands for Individual Retirement Account. “Roth” was named after the late Delaware Senator William Roth, which was the sponsor of the legislation that introduced the Roth designation in 1998.

The tax benefits of a Roth IRA are the ability to pay taxes now on the contributions, your money & earnings & dividends grow tax free then at age 59.5 (or older) you can take the earnings & dividends out 100% tax free. To get this benefit, you have to keep the money in your Roth IRA. If you withdraw the earnings before age 59.5, you will pay taxes on your gains AND a 10% penalty. However, since the money you contributed was post tax, you can take that out at any time.

There are a few exceptions when you can withdraw the earnings early, but there are requirements:

The 5 year rule stipulates that five years must pass after the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account tax-free.

Keep in mind that the five-year clock begins ticking on Jan. 1 of the year you made your first contribution to the account. That means even if you made your first contribution on Dec. 31 of a given year, you get to count the full year toward the five-year rule.

What is the deadline to contributing to a Roth IRA?

Even though December 31 marks the end of the calendar year, the Roth IRA can actually be contributed for the year for an extra few moths. For example, you can contribute to your 2023 Roth IRA up until April 15, 2024 (keep in mind the 2023 Roth IRA contributions are less than they are for 2024).

Should I open a Roth IRA or a traditional IRA?

This will really depend on a few factors, but one big one is taxes. Depending on your tax bracket now, it may make more sense to contribute to one IRA vs the other. Hard to pick one for everyone, as everyone’s situation is different.

Real quick, my podcast called The Decade Investor Podcast releases new episodes every week. This week I dropped three new episodes:

1. The Silent Wealth Destroyer

2. Personal Finance 101 | Money for Beginners

3. Should You Buy a Car with Cash or Finance it with a 1.99% loan in 2024?

You can listen to them on any podcast playing app here: https://thedecadeinvestorpodcast.buzzsprout.com/share

I make too much money, how can I contribute to a Roth IRA?

There is something called the backdoor Roth IRA. The process is simple. You open a traditional IRA, deposit the money (but don’t invest it yet), then rollover your traditional IRA into a Roth IRA. There are still tax implications for doing this, but it allows your money to get into a Roth IRA even if you make over the limit.

All in all I am a huge fan of the Roth IRA. Hard to pass up paying taxes now then getting all that growth 100% tax free for retirement. Of course it all depends on your specific situation if it makes sense to do a Roth IRA.

I want to help you too. I will be able to help you… soon. Stay tuned, I have something coming VERY SOON that will revolutionize the game for Decade Investors.

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I am all about keeping it simple when it comes to money.

Thank you so much for reading & I will see you next week! Until then, keep buying assets.🙂 

- Decade Investor