Hi, friends! It’s been several weeks since my last “Money Monday” post so let's just get back to it! I've been excited to share these posts with you here on TheKristenDiary. As I've gotten into my *cringe* upper twenties, I've become a lot more invested (pun intended!) in improving my finances, planning for the future, etc. I am NOT a financial expert or investment advisor, however I've learned a lot from doing my own research. I'm hoping that by sharing what I've learned to improve my money game, it can help you to improve yours too!
WHY YOU NEED TO OPEN A ROTH IRA NOW
This week marks what is normally considered “tax week” in the financial world. April 15th is usually known as "tax day" or the cutoff for filing taxes in addition to making any retirement contributions for the previous year (in this case, 2020). Most of you are probably aware that this has now been postponed until May 17th thanks to Ms. Rona. Because we've been given this extra month, I wanted to chat about the importance of opening a ROTH IRA retirement account.
One of the best financial decisions I've made within the past several years is opening and funding a ROTH IRA. If you're earning any income at all, you need to open a ROTH IRA now. I know it can feel crazy to think about retirement and saving money for forty or fifty years down the road, however the earlier you start the better. Retirement accounts offer the advantage known as compounding interest (continued growth on both your initial investment AND it's earned interest). It's definitely not as glamorous or exciting as it would be to just spend everything now but it pays to be both prepared and disciplined. Your future self will be glad you did!
WHAT IS A ROTH IRA RETIREMENT ACCOUNT?
Since it can be overwhelming if you're new to the game, let's break it down. A retirement account is a place to put your money where it can then be invested for long-term growth. It's similar to a savings account but there are some differences. Instead of earning a flat interest rate like you do in a savings account, your money is invested into the market (usually through stocks, index funds, mutual funds, etc.). This gives you the ability to grow and earn a lot more money than a savings account will, however it also adds some risk. There are no guarantees in the stock market and anything you invest, you always have the ability to lose. Despite the risk, the overall growth rate of the stock market for the last century has been right around 10% annually. While it can go up and down, most people see consistent, big returns over a long span of time.
Retirement accounts also have more restrictions than savings accounts do. Because they are intended to build money for retirement, they are a lot harder to access and take money back out of. Most of them have penalties and limits on how much or when you can withdraw funds. There are also several different retirement accounts available, the most common ones being 401(K) plans, ROTH IRAs and Traditional IRAs (IRA = Individual Retirement Account).
If you work for a large company, you might have the option to contribute to a 401(K) plan. If you're like me, you might not have this option but can still open either a ROTH IRA or a Traditional IRA (you can also do this in addition to a 401(K)). Unless you're in a high income bracket, a ROTH IRA is likely the best option as it's tax-exempt. This means that you fund it now with money you earn (and already pay taxes on) so you won't have to pay taxes on anything you earn and take out during retirement.
WHO CAN OPEN A ROTH IRA?
Anyone over the age of 18 can open a ROTH IRA that has a source of earned income. If you're under the age of 18, you can still have a parent open a custodial ROTH for you. There are some earned income limits in place. Your adjusted yearly gross income must be under $139,000 / $140,000 (2020, 2021) as an individual or $206,000 / $208,000 (2020, 2021) as married/joint filers. **If you earn over these income limits, you can still do what is known as a "Backdoor ROTH IRA." This is a little more complicated but can offer some advantages.**
HOW DO I OPEN A ROTH IRA?
Opening a ROTH IRA is simple and easy! To do so, you'll need to create an account with a brokerage firm such as Fidelity, TD Ameritrade or Charles Schwab. It is completely free to open an account and setup a ROTH IRA. There is also no minimum contribution requirement to open a ROTH IRA, however there are limits on how much you can contribute. Currently, you can contribute up to $6,000 per year ($7,000 if over the age of 50). I opened my brokerage account and ROTH IRA directly online. All you should have to do is sign up and link your bank account in order to start funding your ROTH.
**Don't forget there are NO MINIMUMS required for a ROTH IRA. Even if you only have $1 to start, open one today and transfer that over! Every little bit helps!**
HOW DO I INVEST WITH A ROTH IRA?
After you setup a ROTH, in order to start growing your money you'll need to start investing. This can seem daunting, however with a little bit of research it is very simple. I currently invest in mutual funds -- funds that are made up of a variety of different stocks, bonds or other securities. This is a great, low maintenance way to invest your money. It allows you to diversity your investment into different companies that are managed by the fund. You can easily research funds to invest in and a lot of the brokerage companies offer their own lists to choose from. **One tip is to make sure you watch out for fees and loads.** Be sure to do some research or ask a financial expert/investment advisor for help!
There's a lot of information when it comes to the investing world, however I tried to simplify the basics on ROTH IRAs. I too am still learning! Don't be afraid to do your own research or talk with someone who can help answer questions for you. It's also a great idea to check out a compounding interest calculator. This gives you an idea on the power of compounding interest and how you can turn X dollars today in XXXX dollars in the future.
I wanted to get this post up with enough time left before May 17th! If you're able to open and fund an account before then, you still can contribute to your account for 2020. After the 17th, you'll only be able to do 2021. The more you can put in, the better. You'll also have the next year to add to 2021 so be sure to do 2020 first! **If you want to open an account but aren't sure where to start investing, you can still fund your account before the deadline. You can allow the funds to sit uninvested in a cash account which will give you credit for the contribution year without having to invest anything right away.**
Hopefully this post is insightful and not too much information overload! Finance and investing can seem overwhelming at times but is easy enough to understand once you get started. Google can also be your best friend!
I'd love to know some of your finance tips, let's chat on IG (@TheKristenDiary)!
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