Heavy Flex: The 11 Reasons Why Absolutely Everyone Should have a Roth IRA
Financial Foundations
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Financial Foundations •
Empowering Our Financial Wellness: Taking Advantage of the Roth IRA
Recipe: Financial Foundations: Having a Smart System
Flexible. Tax-Free. Quick Access to Money. Investing in a Roth IRA is choosing the VIP lane on your road to financial freedom. It's a savvy move for anyone eyeing a future of flexibility when it comes to when and how they can access and use their money. It’s both a powerful ingredient for retirement, and for life’s big goals and milestones, all while keeping as much of your money as possible – with a ton of powerful options.
What’s a Roth IRA, Anyway?
A Roth Individual Retirement Account, Roth IRA is your personal savings powerhouse. You put in money that you've already paid taxes on, it grows tax-free, and you don't pay taxes when you take it out.
When retirement rolls around, whether that’s sooner or later, you get to spend this money without paying taxes, capital gains, or income taxes. It’s planting a garden where you get to enjoy every single fruit of your labor without having to share with Uncle Sam.
Why Everyone Should Have an Roth IRA:
1. Tax-Free Growth:
The money you invest in a Roth IRA grows tax-free, which can help your savings grow and compound more effectively over time and help to outpace inflation.
2. Tax-Free Withdrawals:
Money you take out of your Roth IRA is also tax-free, so, unlike other investment and retirement accounts, you get to use 100% of your money without needing to account for taxes.
3. No Waiting until 59 ½! Your money is accessible without penalty after just 5 years:
Unlike other retirement accounts where you have to wait until 59 ½ years old to access money without penalty and fees, with a Roth IRA, you can withdraw contributions – money you’ve put in – anytime after the account has been open for 5 years without taxes or penalties.
4. Fund Big Life Events with No Early Withdrawal Penalties:
In addition to being able to withdraw contributions – the money you put in, after 5 years, at any time, you can withdraw up to $10,000 of earnings – the money your money has made, like dividends and increased value – for things like a first-time home purchase, qualified educational expenses, or early retirement, without penalties or taxes, making it easier to invest in significant milestones. Since you can withdraw your contributions tax- and penalty-free at any time after 5 years, a Roth IRA can also act as an emergency fund for unexpected expenses, providing peace of mind without derailing your long-term savings goals.
5. Extra Security for Surprises:
Life’s unpredictable. The cool part about a Roth IRA is you can take out what you put in, without a penalty or taxes, whenever you need it. Unlike the 401(k), which typically involves a ton of paperwork and reasons you need to validate as to why you may need the funds, with a Roth IRA, if your account has been open for 5 years, simply withdraw the money.
6. Invest However You Like:
Unlike most 401(k)s which offer limited investment options, Roth IRAs offer a wide range of investment options, from stocks and bonds to mutual funds and ETFs, allowing you many more options to tailor and adjust your investments.
7. No Tax on Dividends:
Unlike in a brokerage account where you pay capital gains tax or income tax on dividends, dividends in your Roth IRA are tax free. Because they are earnings, they’ll need to stay in the account until 59 ½, and once you withdraw them, they will still be tax-free.
8. Estate Planning Made Easy:
Roth IRAs can be passed on to your heirs tax-free, making them a strategic tool for estate planning and leaving a financial legacy without the burden of taxes on your loved ones.
9. Protection from Tax Increases:
Contributions to a Roth IRA are made with after-tax dollars, securing your savings against potential tax rate increases in the future. It’s a smart move if you believe taxes might be higher by the time you retire.
10. No Age Limit for Contributions:
Unlike other retirement accounts, you can continue to contribute to a Roth IRA at any age, as long as you have earned income, supporting continuous growth of your retirement savings. This allows individuals who continue to work later in life to keep adding to their retirement savings. This is particularly beneficial for those who might have started saving for retirement later in life, for those with a working retirement, or for those who want to maximize their savings as much as possible.
11. No Required Minimum Distributions (RMDs):
While most retirement accounts require you to start withdrawing money at 72 years old, Roth IRAs don't have RMDs during your lifetime, allowing your investments to continue growing tax-free for as long as you want, and make it easier to leave a tax-free inheritance to loved ones.
Real Talk: Alex’s Early Retirement
Alex works as a Designer for a large company and freelances on the side. He’s able to retire early at 49, after years of smart saving.
He started his Roth IRA in his 20s, putting in $4,800 a year. By the time he hit 49, his Roth IRA had grown to over $550,000 – over half a million dollars, thanks to his consistency and the magic of compound interest.
Because his money is in a Roth IRA, when he decided to retire, he could take out his money tax-free, using it to enjoy his early retirement without stress. He can also continue to contribute in smaller amounts from his occasional freelancing projects. Alex’s situation shows that with some consistency, simple investing, and a Roth IRA, retiring comfortably isn’t just a dream.
It’s important to not just put money in your Roth IRA, but also to invest it. A great foundation is usually to invest in the S&P 500 – the biggest 500 companies in America.
Taking Tiny Action Today: Small steps toward a big retirement account
Small steps are still progress. ‘A journey of a thousand miles begins with a single step’, as they say.
Whether you have a Roth IRA or not, take a few minutes to calculate how much you could put towards a Roth IRA today, and every paycheck, even if it’s $20.
If you don’t yet have a Roth IRA, look into 3 companies and compare options. Places like Fidelity, RobinHood, Charles Schwab, Ally, and more can be compared and contrasted in our article, How to Find the Right Roth IRA.
If you already have a Roth IRA, look into investment options that track the S&P 500.
And, whether you’re able to invest money today or not, it’s important to open the Roth IRA account to start the 5-year eligibility clock for withdrawing funds.
The Flexibility of the Roth IRA
A Roth IRA isn't just another retirement account. It's a versatile tool that adapts to your life's twists and turns, offering freedom, flexibility, and tax-free growth. Whether you're saving for retirement, a home, or a special celebration, a Roth IRA stands out as a wise choice for securing your financial future without putting today's needs on hold.
Having a Roth IRA is sets up a financial cushion for your future self. It's simple, smart, and gives you freedom and flexibility with your money. Whether you're thinking about early retirement or just want to make sure you've got a solid plan, a Roth IRA can help you get there with less stress and more security.
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© 2024 | Adapted from our bootcamp & published book, Simple Wealth Recipes, and Framework, The Simplest Steps to Wealth
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