If you know me at all, you know I am totally OBSESSED with Roth IRAs. I think they are one of the greatest life hacks to exist and I want everyone to know about them while they’re young so they can be millionaires by the time they retire and live their best life!!
For those of you who don’t know what a Roth Ira is, it’s basically a retirement account so it holds your investments until you retire. It is not an investment itself, it just holds investments like stocks and bonds. But wait, that’s not all. The beauty of a Roth IRA is that the government wants to encourage you to start saving up for retirement so they give you an insane perk – tax free gains.
Tax free gains means that you do not need to pay a dollar of taxes on any of the money your investments grow to. This might not sound awesome, but it is a game changer. This means that for the next 20/30/40 years, you will be investing into your Roth IRA, and hopefully with so much time it will grow many times over, and when you retire at 59.5 or later, you can take all of that money out of your Roth IRA without paying ANY taxes on it. Keep in mind, taxes usually take 20% or MORE of your gains so this. Is. huge.
Sound too good to be true? It is. Here are the catches.
Yeah this whole “tax free gains” thing is sick, but because it’s so awesome the government limits how much you can invest in your Roth IRA per year. If they didn’t limit it, people would invest all their money in their Roths so they won’t need to pay tax on any of their investments.
What is the limit you might ask? Well it’s always changing. For 2020, the limit is $6,000 if you’re under 50 and $7,000 if you’re over (help them catch up, you know). If you can, go ahead and contribute up to the max in your Roth IRA to really take advantage of this sick life hack, but if you’re a student holding onto your last $20 for dear life, no pressure to hit that limit, just invest whatever you can. Remember that even putting $100 in your Roth in your 20’s will let it grow sooo many times over (hopefully!) by the time you retire – every dollar counts!!
Money Going In
When it comes to money you want to invest in your Roth, there are 2 catches.
1. It needs to be money you have earned on the books
So no putting cash you earned from babysitting, tutoring or anything else in your Roth IRA! Venmo, Zelle, Paypal and all those payment apps count as cash, so they’re no good either.
2. You need to have already paid taxes on it
Usually jobs that are on the books (like camp counselor, waitressing, working at a store, etc) withhold taxes for you, so you’re good to invest your paycheck. Just make sure taxes have already been taken out.
So who wants to get their salary over $150k? Same.
But there’s actually an income limit on who can contribute to a Roth IRA. The government is giving you a tax break with a Roth IRA, so if you earn over a certain amount of money, you don’t qualify for this tax break, which stinks. That limit is $139,000 for 2020 if you filed as a single, and $206,000 if you are married and filed jointly. Hopefully that limit goes up in the future, but regardless we need to take advantage of being broke now and contribute as much as we can to our Roths!
If you do earn more than the limit, know that yes, your relationship with the best account ever is temporarily broken, but don’t worry you can still contribute to a different retirement account. You still have Roth’s (less cool) cousin – a Traditional IRA! (links to post on traditional IRA)
Like I said before, a Roth IRA is all about investing for the purpose of your retirement, and the government wants it to stay that way. So take your money and say goodbye, because you probably will not see it again until you retire. Actually that’s not true because you can always take out the principal amount (the money you invested). But you can’t take out your gains (money you’ve made on your investment) until you are 59 ½, unless it’s for a very specific purpose, like for education, your first home, and certain expenses related to birth or adoption.
And while you technically can withdraw your money from a Roth IRA, you shouldn’t! Remember it’s an amazing hack that you really should take advantage of every year you can! Leave your money in for as long as possible and let it grow and grow!
Do you love Roth IRA’s as much as me yet? How can you not?! What are you waiting for? Open up your Roth IRA now and get on your way to retiring rich!