If you heard that you should open a Roth IRA, that was some good advice. A Roth IRA is one of the best retirement investments you can make. This article will cover how to start a Roth IRA because it is a little bit more difficult than just opening one.
What is a Roth IRA
A Roth IRA is a type of retirement account that you can open. What makes it so good? In a nutshell, when it comes time for you to withdraw from this account when you retire, the distributions (withdrawals) are NOT taxed. You fund your Roth IRA with post taxed money and it is allowed to grow and you don’t have to pay taxes on the gains.
In a normal Taxable accounts, you have to pay something called capital gains on the growth of your account. That means once your $1000 deposit grows to $5000, you would have to pay taxes on $4000, the amount of appreciation.
Limitations of Roth IRA
There are some limitations about a Roth IRA.
- You must have income to make a contribution. If you made $1000 last year you can ONLY contribute up to $1000 for that year
- There is a max contribution limit per year. For 2015 and 2016, the max contribution is $5,500 ($6,500 if you’re age 50 or older)
- There is a max income level to contribute to a Roth IRA. For a single filer, it is $116,000 for 2015. There is a technique for a Back Door Roth IRA which I will cover in a different post for higher income people looking to get in on the Roth IRA
How to Open A Roth IRA
I personally use Fidelity to handle my Roth IRA. I think it’s pretty good. You also can’t go wrong with Vanguard. Here’s the quick instructions:
- Open a Roth IRA account with a company.
- Contribute as much as you can afford to.
- From January to April 15th, you can still contribute to the Roth IRA for the previous year. Do it if you have not already contributed for that year.
- After April 16th, you can only contribute for the current year.
- You might be asked what to buy or to put your money in a Money Market Account or something like that. Just put it in the Money Market for now.
- Take that money in your money market account and buy an Mutual Fund. More on this below
What is Money Market
Money Market is basically just where your cash is when you haven’t bought any funds yet. It’s essentially a savings account which will earn you low interest.
What Should I Buy?
Keeping you money in the Money Market account is not good enough. You will not make any money there! You MUST invest in something! What should you invest in? Just buy the stock ticker “VOO”
Why “VOO”? In a nut shell, when you buy VOO you are buying all the stocks in the S&P 500 and that is a great diverse set of stocks. Also VOO is an ETF by Vanguard with the lowest operational cost. Low operational costs mean more money for you. I will write a complete reason of why you should buy VOO or maybe VTI later in another post on its own.
Ok, in short, open a Roth IRA because it’s awesome. Contribute as much as you can afford. Buy a well diversified ETF like VOO.