Financial Coaching Blog,  Investing In Retirement

What is a Roth IRA?

As a follow up to my Roth 401k post, today I wanted to talk about the SECOND best retirement account, a Roth IRA.

And no, a Roth IRA is not the same as the Roth 401k.

Roth IRAs have been around since 1997 & similarly to the Roth 401k, your contributions are after tax, grow tax free, and at withdrawal are tax free. As I mentioned in my Roth 401k post, you should have BOTH. A Roth 401k through your employer (if offered) & a Roth IRA. Truthfully, everyone should have a Roth IRA because it isn’t associated to any one employer as it’s Individual to you (Individual Retirement Account).

Here’s why you should have one:

1. The biggest advantage to a Roth IRA is that it doesn’t ever require you to take minimum distributions (Roth 401k requires this). This flexibility allows you to continue contributing to this account beyond age 72.

2. In relation to the above, you could designate your Roth IRA to be left for your spouse or descendants tax free.

3. As another huge advantage is the ability to choose your own investments from a wide range of choices! This allows you to pick options with less expenses and fees. (The Roth 401k doesn’t allow this as the choices are designated by you employer)

4. Perhaps another added benefit is the ability to take pre-retirement withdrawals from YOUR contributions without penalties or taxes. This doesn’t include the EARNINGS which will come with a 10% penalty if under the age of 59 1/2.

5. Furthermore, if buying a home for the 1st time or expecting a new child would allow you to withdraw the earnings free of penalty for accounts aged less than 5 years & free of penalty and taxes for accounts older than 5 years.

Ok so what about disadvantages?

  1. The biggest disadvantage of a Roth IRA is its income limit. Individuals who make $140k or more & married couples who make $208k or more are NOT eligible for Roth IRAs. (Roth 401ks don’t have an income limit). However, for those high income earners, there are other routes including a BackDoor Roth, which I’ll cover on a later day.
  2. Your annual contribution limit is also lower than a Roth 401k. $6,000 a year for a Roth IRA versus $19,500 for a Roth 401k.
  3. No employer matching contributions in a Roth IRA.

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