In this video, I’ll go through the things you need to do before investing in a Roth IRA.
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A Roth IRA (Individual retirement account) is a type of retirement savings account in the United States that offers several tax advantages. Here’s a breakdown of its key features and how it works:
Post-Tax Contributions: Unlike traditional IRAs, where contributions may be tax-deductible, contributions to a Roth IRA are made with after-tax dollars. This means you don’t get a tax deduction for the money you put into a Roth IRA.
Tax-Free Withdrawals: The primary benefit of the Roth IRA is that qualified withdrawals are tax-free. Given that the contributions were already taxed, the principle can always be withdrawn without penalties. Moreover, once the account has been open for at least five years and the account owner is at least 59½ years old, all withdrawals (including earnings) are tax- and penalty-free.
No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don’t have RMDs during the lifetime of the original owner. This means you’re not required to start taking money out at age 72 (or 70½ if you turned 70½ before January 1, 2020).
Income Limits: Not everyone can contribute to a Roth IRA. Eligibility is based on your modified adjusted gross income (MAGI). The IRS sets income limits that determine whether you can contribute, and how much you can contribute. If your income is too high, you might not be able to contribute to a Roth IRA.
Contribution Limits: As of my last update in 2022, the annual contribution limit for a Roth IRA is $6,000 for individuals under age 50, and $7,000 for those age 50 and older (these limits are subject to change based on inflation and IRS guidelines).
Flexibility: Roth IRA contributions can be withdrawn any time without penalty, which provides some flexibility. However, it’s important to note that this doesn’t apply to earnings – if you withdraw the earnings before meeting the qualifying criteria, you may face taxes and penalties.
Conversion: Some people might opt for a “backdoor Roth IRA” if they earn too much to contribute directly to a Roth IRA. This involves contributing to a traditional IRA and then converting that to a Roth IRA. It’s a nuanced strategy and can have tax implications, so consulting with a financial advisor is recommended.
Even with all of those benefits, there are some things you’re going to want to focus on before investing a Roth IRA which is what we touch on in this video. They include maxing out your health savings account, investing up your employer match, paying off high interest debt, and a few other things.
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Disclaimer: This video is for entertainment purposes only. Everyone’s situation is different so do your own research before making any decisions with your money….(read more)
LEARN MORE ABOUT: IRA Accounts
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REVEALED: Best Gold Backed IRA
Do This Before You Invest In a Roth IRA
A Roth IRA is a popular retirement savings option for many individuals. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning that withdrawals in retirement are tax-free. This makes it an attractive option for those looking to minimize their tax burden in retirement.
Before you jump into investing in a Roth IRA, there are several important considerations to keep in mind. By carefully evaluating these factors, you can ensure that you make the most out of your investment and set yourself up for a secure retirement.
First and foremost, it’s important to assess your current financial situation. Before investing in a Roth IRA, it’s essential to have an emergency fund in place to cover unexpected expenses. Financial experts generally recommend having 3-6 months’ worth of living expenses saved in an easily accessible fund before making any investments.
Next, take a close look at your debt situation. If you have high-interest debt, such as credit card debt, it may be more beneficial to pay off these obligations before investing in a Roth IRA. While the potential for tax-free growth is appealing, it may not make sense to invest when you have outstanding debts that are accruing interest at a higher rate than your potential investment returns.
Additionally, it’s important to consider your current and future income tax bracket. If you expect to be in a higher tax bracket in retirement, a Roth IRA may be a smart choice as it allows you to pay taxes on your contributions now at a lower rate. On the other hand, if you anticipate being in a lower tax bracket in retirement, a traditional IRA may be a better option as it allows for tax deductions now and taxable withdrawals in retirement.
Once you’ve assessed your financial situation and tax considerations, it’s time to choose the right Roth IRA provider. Look for a reputable financial institution that offers low fees, a wide range of investment options, and excellent customer service. It’s important to carefully review the terms and conditions, as well as the fees associated with the account, to ensure that it aligns with your investment goals.
Finally, it’s crucial to develop a solid investment strategy for your Roth IRA. Diversifying your portfolio with a mix of stocks, bonds, and other assets can help minimize risk and maximize potential returns. Consider working with a financial advisor to create a personalized investment plan that aligns with your risk tolerance and retirement goals.
In conclusion, opening a Roth IRA is a smart move for those looking to save for retirement while minimizing their tax burden. However, it’s crucial to take the time to evaluate your financial situation, consider your tax bracket, choose the right provider, and develop a solid investment strategy before making any contributions. By carefully considering these factors, you can make the most out of your Roth IRA and set yourself up for a secure retirement.
Anyone able to explain to me what it means to max out a 401k. If an employer matches you at 6% and you match that. Is that considered maxing out or is it when it comes to choosing what percentage you are allowed to max out at with the total limit being at $20,000 +max for a 401k?
HSA is still taxed as ordinary income once you withdraw it in retirement, so how is it tax free then?
Would you also advise having an emergency fund in place before?
Can you use HSA for medical outside of the USA? Or that differs from entity to entity?
Hi, great video thank you. Can you make a step by step video on how to purchase treasury notes on treasury direct? Thank you
We are retired and have a bit of HSA money accumulated. Next year is the last year I can contribute due to turning 65 later in the year.
Be aware that you can pay your Medicare B And D premiums with HSA money. Presently that works out to about $200 per month. For a couple on Medicare this is about $5000 per year. So just on Medicare premiums you will pay over $100,000 in retirement! This is before getting any care!
So most couples will easily pay $200-300k just in Medicare premiums over their retirement.
If you are healthy, and especially if young and healthy, I highly advise getting HSA qualified insurance and contribute the max, AND INVEST IT!
ITS BASICALLY FREE MONEY!
As you say BETTER THAN A ROTH. No worries about tax brackets now vs then. You can’t lose!
investing in HSA supports the broken US health care system, we need universal health care
Make a video on cash value life insurance
I love HSA!!!❤
Not everyone can contribute to an HSA. For instance, if you're deductible is low. I have Tricare, so there's no way I can have an HSA. That's f*cked up.
another question ,If you move a Roth IRA from one brokerage to another after the 5 year rule has been satisfied ,does that carry over with the move or does the 5 years start over, thanks
If I open a second Roth IRA at another brokerage would the new Roth IRA have another 5 year rule even though I've already satisfied the 5 rule with the first Roth IRA ?
What about those of us who are not eligible for an HSA? The best I can do is a FSA.
You suggested for those unsure if they meet the Roth IRA threshold, that they contribute to a traditional during the year and then backdoor. The advice was for those who want to get their money invested sooner. But a key to backdoor (to avoid Pro Rata issues) is to money this money quickly without gains. You even have an asterisk in your diagram about not investing the money initially. So, how does this actually get your money invested sooner?
I don’t qualify for a HSA. Am I missing out? What can I do make up?
I need to start saving for my kids college and marriages. I was thinking of opening Roth IRA for them? Any advise?
Great points! I have moved HSA to my most preferred account in the order of investing as well! I would add that some employers also offer contributions to an employee's HSA, so that is another benefit you want to make sure you are getting. Also, if you contribute to an HSA via payroll then you may be able to reduce your FICA tax!
Hi Jarrad, Is there a limit to open more than 1 Roth IRA?
Be aware that California and New Jersey tax HSA contributions and earnings.
I began contributing to an HSA (and investing it) because of you. 🙂 Oh.. and you are correct about the rehabs too, unfortunately health insurance companies make the rules and tell everyone (including doctors) what they can do.
Hey Jared I appreciate what you're saying, but I need to keep things as simple as I can because my wife cannot seem to understand and grasp how all of these investment accounts work. Even after trying to explain it to her for months she still doesn't really know how we Roth IRA works. If I passed away she has to have the simplest configuration as possible so I'm going to stick with the roth for now 😉
What happens if you contribute to Roth IRA with no earned income?
I agree. People who withdrawal too early from their retirement accounts should be shamed. lol