Throughout my twenties, I had jobs that did not offer any kind of retirement plan like a 401k. And around my mid-twenties I started worrying about retirement (as many of us do…right???). I literally googled a retirement calculator and tried to figure out how much money I’d need to happily retire to a life of sipping Mai Tai’s, hanging with my cat, and binge-watching whatever the future version of Netflix is.
Turns out, I needed a fair amount.
So, I asked some friends and family who are ~good~ with money to tell me about retirement plans for people who don’t have 401K’s. They recommended I open a Roth IRA – one of them even said I should have opened a Roth like right after college (OOPS).
But first, I had to figure out WTF a Roth IRA even was.
After more questions directed at my friends and family (and more Googling), I finally, kinda, sorta had an idea what a ROTH IRA was and how they work. But, most importantly, I realized that YEAH, I totally needed one.
To help save you some of the headache I went through, here is a VERY SIMPLE break down about what a Roth IRA is and why it’s a really good idea to open one as soon as possible.
What the heck does “Roth IRA” even stand for?
IRA stands for “Individual Retirement Accounts” and the Roth part is named after Senator William Roth who helped create it.
What are these “Individual Retirement Accounts” really though?
They are a lot like your savings account at your bank. But the benefit of an IRA over a savings account is that it GROWS because you can invest that money into things like stocks. The longer you let this money grow the MORE money you’ll have to take out when you retire. Hence, it’s best to open a Roth IRA when you’re young.
TL;DR – IRA’s are great for young people.
So, if there’s a “Roth” IRA is there a ~normal~ IRA?
Yes, and it’s called a “Traditional IRA.”
Okay cool. So why don’t I want a Traditional IRA?
Well, you might want a Traditional IRA, but it depends on your financial situation. Here are some basics to consider.
How much money do you make?
I know, it’s an invasive question, but this is important when considering what type of IRA to open. First of all, if you’re single (not married) and making more than $164,000 you CANNOT contribute to a Roth IRA. And if you are married, you and your partner CANNOT be jointly making more than $183,000. You can also make partial contributions if you make between $116,000 and $131,000 as an individual or between $183,000 and $193,000 as a couple, but that needs to be calculated.
TL;DR – If you make more than $164,000 a year, you CANNOT put money into a Roth IRA.
The issue with Taxes.
Everyone hates taxes, right? They’re generally a pain in the butt. Well, they also come into play with IRA’s, because OF COURSE THEY DO.
When you get your paycheck, it gets taxed. You can then take that money and put it into a Roth IRA. When you turn 59 1/2 (yeah, I know it’s a random age), you can take that money in your Roth IRA out, which in theory has been growing and making you even more money for those few decades, and you WILL NOT get taxed. Yippee!!
However, with a Traditional IRA, when you turn 59 1/2 and take your money out of it, you DO get taxed. They will tax that retirement money like it’s your income. Booo!!
TL;DR – You’ll probably pay less taxes OVERALL with a Roth IRA.
What if you want to take money out of your IRA before you’re 59 1/2 (because, don’t worry, you can)?
Both Traditional and Roth IRA’s let you take your money back out of them. The main difference? A traditional IRA will charge you a 10% penalty. Ugh. However, a Roth IRA will not charge you a penalty if you need your original contribution money back, but they WILL charge you a 10% penalty on any “earnings” (you know, that extra money we talked about that will magically grow in your account over time). Also, there are some exceptions with both IRA’s, like purchasing your first house.
TL;DR – Roth IRA’s won’t charge you anything extra for taking your originally contributed money out.
Okay. This is sounding pretty good. So, how much money can I put in a Roth IRA?
Overall, there is no limit, you can contribute money to an IRA for as long as you want. However, annually, you can only contribute $5,500 max ($6,500 once you’re over 50).
Man this is a lot of information to take in.
Yeah, it really is. If you’re still confused, but want to learn more about planning for your retirement you should definitely schedule an appointment with someone at your bank to discuss Roth IRA’s more in depth.
Or, you know, you could just do ~my~ thing and google some more information until you feel more comfortable with investing for your future!