Top 5 Reasons to Open Roth IRA (and How to Do It)

Last Updated by Neiko Johnson on 
August 15, 2021
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5 Reasons to Open an Roth IRA

Would you like to learn 5 reasons to open Roth IRA today?

Saving for retirement is how you prepare yourself for your future. Most importantly, you need to invest if you don't want to work the rest of your life.

We don't plan on working the rest of our lives. But, we are spending time planning for retirement now.

The earlier you start investing the better off you will be in the long run.

There are a lot of reasons you should spend time planning for retirement. Here are a few reasons:

  • You can retire early.
  • You can work because you choose to, not because you have to.
  • Compound interest means you earn more by starting early.
  • You can have financial independence later in life.

It's very common for investing to intimidate people and create stress. However, it doesn't have to be hard to get started. You might feel unprepared or unfamiliar with certain terms or you may think you don't have enough money to get started. However, you have to remember that everyone started from the beginning. Anyone who has a big investment portfolio today started right where you are. Ultimately, they had a lot of questions about how to start investing. Above all, don't feel discouraged or ashamed about retirement. You may have a lot of questions and not know how to get them answered. Before we started helping people with money, we didn't have all of the answers. And we still don't! We are constantly learning new information daily and trying to help as many people as possible win with money. Today, we are going to talk about opening a Roth IRA and how to do it. Related reading:

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a retirement savings account that allows you to pay taxes on the money you invest upfront.

Most importantly, the growth you receive in your Roth IRA is tax-free. That includes any withdrawals you make after age 59 1/2 as long as you've had the account longer than 5 years.

Important to realize, since you pay taxes on the front end with a Roth IRA, you don't owe any tax in retirement.

Here are 5 reasons to open a Roth IRA and how to do it.

Tax-free retirement income

As stated above, a Roth IRA grows tax-free. The main difference between a traditional IRA and a Roth IRA is how each account deals with taxes.

A traditional IRA offers a tax break on the front end but you will owe income taxes when you pull the money out.

On the other hand, a Roth IRA provides tax savings later. However, it's worth it! Most people will have a higher tax rate later in life than it is right now.

In fact, with you contributing post-tax dollars now, you won't have to worry about the IRS later. When you start withdrawing money in retirement, you owe no money. The money is yours free and clear!

Most people can open Roth IRA today

Roth IRAs do have income limits. In 2021, those limits are $140,000 in modified adjusted gross income for single taxpayers or $208,000 for married couples filing jointly.

However, there is a workaround for the income limit rules. With a little bit of work, an existing traditional IRA can be converted into a Roth IRA. Also known as the backdoor Roth IRA.

But, there's a catch. You must pay taxes on any contributions that were deductible as well as any investment gains within the account prior to conversion.

Once those steps are complete, you now have a Roth with all of the great features!

Early access to the money

Opening a Roth IRA makes it easier to access your money than the traditional IRA. However, you want to put away money for retirement and let it grow if possible.

If you take an early withdrawal from a traditional IRA before age 59 1/2, you will pay income tax on that money and an early 10% withdrawal fee (some exceptions do apply).

You can avoid the taxes and the penalty when opening a Roth IRA as long as you withdraw money from your contributions and not earnings.

Be sure to fully understand how to withdraw money from your Roth IRA to avoid triggering a tax event.

Lock in your current tax rate by opening a Roth IRA

By opening a Roth IRA you don't get to skip paying taxes. You have already paid taxes when you contribute. So when you retire, withdrawals will not increase your taxable adjusted gross income (AGI).

The best part is your Roth contributions have compounded a lot over the years, so you're receiving even more of a tax break.

In fact, when choosing between a Roth vs traditional IRA, consider if you think you'll be in a higher tax bracket when you retire than you are today. It's best to go with a Roth IRA if you think you will be in a higher tax bracket.

Younger people who are just starting with investing will probably choose Roth since their income and tax rates will likely be much higher in retirement.

No required minimum distributions (RMDs) with Roth IRAs

Opening a Roth IRA gives you a special benefit by not requiring minimum distributions (RMDs).

In fact, RMDs will increase your income later in life. This can result in your tax bill increasing and affecting other areas of your finances.

The option to choose a Roth IRA and leaving your savings untouched is a great benefit versus choosing other retirement options.

How to invest for retirement and open a Roth IRA

The most important thing with investing is to start early. You may have the ability to invest through your employer but opening a Roth IRA is another great option.

Above all, you must decide what type of investor you are. Are you a "do-it-yourself" investor or "manage it for me" investor?"

You can open your Roth IRA using a financial service company. These companies help with financial planning and advice, retirement planning, and wealth management strategies.

Also, your bank may offer Roth IRAs. Most large firms offer online access to start an account.

Below are a few great options to open a Roth IRA:

This is a lot simpler than you may think. You can choose your investment options of three or four mutual funds. Important to note, check the trade commission and investment fees when choosing a company.

To get started with opening a Roth IRA you will need the following:

  • Your driver's license or another form of identification.
  • Bank account information (checking or savings).
  • Your Social Security number.

Also, you will choose a beneficiary (or beneficiaries) who will inherit your Roth IRA. You will need their name, Social Security number, and date of birth.

Remember, if you need assistance with opening your Roth IRA, you should talk to an investment professional.

You just learned the important things about opening a Roth IRA and how it will benefit you in the future.

Opening a Roth IRA is easier than you thought, right? Now, it's time to get started today!

Are you currently saving for retirement? Why or why not?

Article written by Neiko Johnson
Neiko is a personal finance expert and Co-founder of Secret to Finance. Along with his wife Alexis, they learned how to get out of debt and paid off $400,000 in 4 years.

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