updated September 14, 2022
I love the start of a new year. It’s my time to write goals for the year, and get a fresh start. One of my favorite things to do every year… is max out my Roth IRA!
What is a Roth IRA?
A Roth IRA is a type of individualized retirement account where you contribute your post-tax dollars. The money you contribute to your Roth IRA is not tax-deductible. But once you start withdrawing funds, the money is tax free.
This differs from a traditional IRA, in that the money you contribute is pre-tax dollars. This allows you to get a tax deduction on your contribution. However, when you withdraw the money from this account during retirement, you will have to pay income tax on these withdrawals.
A Roth IRA is also different from a 401(k), in that employers offer this type of retirement plan to their employees, potentially with a percentage match, and the contributions are withdrawn from the employee’s paycheck pre-tax.
Benefits of a Roth IRA
A bonus to a Roth IRA is that you can withdraw your contributions at any point in time, tax- and penalty-free, so long as you withdraw ONLY what you have put it.
Once you hit 59.5 years old, and you have held this Roth IRA for at least 5 years, then you can start withdrawing the account earnings (returns that the account has generated).
There are other conditions as well that I won’t go into (as they can get confusing), but know that basically you can withdraw before 59.5 years old so long as you only withdraw what you put in.
Limitations of a Roth IRA
There are some limitations to a Roth IRA for the year 2022. First off, if you are single and make more than $144,000, or married filing jointly and make more than $214,000, then you can’t contribute to a Roth IRA.
There are also limits for how much you can contribute. Investopedia’s article, “What is a Roth IRA? Guide to Getting Started,” lays out the contributions for the year. In 2022, you can contribute up to $6,000. However, if you are 50 and older, you can contribute up to $7,000.
According to White Coat Investor’s article, “The 2023 Retirement Plan Contribution Limits,” these contributions will increase to $6,500, and $7,500 if you’re 50 and older!
Why is this a good option?
A Roth IRA is a great choice if your employer doesn’t have a retirement plan option. It is also a good option if you’re self-employed and want your own retirement account.
Also, if you think your taxes will be higher in retirement compared to now, Roth IRAs are a great choice, as when you start to spend these funds they will be withdrawn tax free.
Investing your Roth IRA
You set up a Roth IRA – congrats! But that’s not all… you still have to choose your investments!
The financial firm you choose will help you open the account, but ultimately it’s up to you do decide where you invest your money.
I personally like to choose Low Cost Index Funds. Index funds are a great way to diversify your portfolio, without putting too much effort into it. And let’s be real, as an allied health professional, you’re way too busy to worry about where to invest your money!
I use Vanguard, because I like to invest in VTSAX and VTI, so it makes it easier for me to invest my money all in one place under one account.
Most brokerage ﬁrms, banks, and investments companies, both brick-and-mortar and online, offer a Roth IRA and Low Cost Index Funds. I would recommend looking into a Roth IRA with a bank or investment company that you already use, to make it easier on yourself.
If you want to learn more about investing, or if you want mentoring in your finances, let’s work together to help you on your personal finance journey! Click here to sign up for your FREE 20 minute consult.
Like what you read? Check out some of my other blog posts!
- What are Low Cost Index Funds?
- 3 Methods to Pay off Your Debt
- What is a High Yield Savings Account (HYSA)?
- What is a 529 Plan?
Note: I am not a certified financial advisor/planner or a certified financial analyst or a CPA or an accountant or a lawyer. Remember, I am an allied health professional, just like you! This website/blog is for entertainment and educational purposes only. Please consult with your financial advisor(s) regarding your personal finance, investment, and tax matters.
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