If you are new to investing, or even just getting your personal finances in order, chances are good that you have heard of a Roth IRA. Just about every talking head on TV says you should invest in a Roth IRA, but what many of them fail to do is fully explain the advantages and disadvantages of investing with a Roth IRA, how and where to invest with a Roth IRA, and other important information to help you get started. So we’re going to cover those topics today, and by the end of this article you should be able to understand what a Roth IRA is, why it is or isn’t a good investment option for you, and where you can go to open a Roth IRA (hint, the entire process only takes about 20 minutes!).
What is a Roth IRA?
When many people hear the term “invest in a Roth IRA” they assume it is an investment they can go buy. In fact, a Roth IRA isn’t an investment you can purchase, it is an account you put investments inside. To explain it another way, you can open a Roth IRA, then buy investments with the money you put in your Roth IRA account. How Roth IRAs work. Roth IRAs get a lot of attention because they offer a unique investment opportunity for people who are interested in investing for their retirement. A Roth IRA is a tax advantaged retirement account that gives investors the ability to make contributions with money that has already been taxed, then make qualified withdrawals tax free when they reach retirement age (59 1/2). This is huge! That means your investments have the potential to grow for decades without the drag of taxes slowing them down!
Is a Roth IRA a Good Investment Option for You?
Roth IRAs are actually one of the most flexible retirement accounts you can open, offering unique advantages for both how long you can invest, and when you can make withdrawals.
- No minimum distribution requirements. Roth IRAs do not have a required minimum distribution age, so you can leave your money in your retirement account as long as you want (most retirement plans require you to start taking distributions once you reach age 70 1/2).
- Roth IRA withdrawals. There are IRS rules that allow people to withdraw some or all of their contributions without taxes or penalties before retirement age if they need the money. I don’t recommend this unless it is absolutely necessary because you will hurt your retirement goals, but it is an option. (Note: you can only withdraw contributions without taxes or penalties; earnings on those contributions must remain in the account or they will be taxed and/or penalized). You may also be able to make withdrawals to purchase your first home or for higher education costs. Be sure to read more about this before acting!
How and Where to Open a Roth IRA
Opening a Roth IRA is easy. The entire process takes no more than 20 minutes if you already have an account open with the financial firm that you plan on using to open your Roth IRA. Here is a list of some great places to open a Roth IRA if you don’t already have a place in mind. All you need to do is log in to your account (add 15 minutes if you need to open an investment account), fill out a quick form, select your investment, and transfer money. That’s it! OK, it does take a little research to know which investment to purchase, but it really is that easy to open a Roth IRA. If you don’t know where to go to start, I recommend reading some first time investor strategies to help you learn the basics. There are many investments that are not complicated and offer investors access to a wide range of funds and diversification that will help you reach your retirement goals.
Is a Roth IRA for you?
A Roth IRA isn’t for everyone. There are income limits that may prohibit some people from contributing, and some people may have a better investment opportunity, such as matching contributions with their employer sponsored 401k plan. There are advantages and disadvantages to investing in a Roth IRA, but for most people, the pros far outweigh the cons.