When it comes to IRAs, there are two main types to be aware of: traditional and Roth. Both are great to explore if you donâ€™t have an employer-sponsored retirement account; however, the tax breaks work in different ways. Traditional IRAs are not taxed upfront, while Roth IRAs are taxed up-front. While both methods are popular, you should evaluate which option is best for your unique situation.
A Roth IRA has a few key differences from traditional IRAs:
If you want to contribute to an account for as long as youâ€™d like, a Roth IRA is a good idea. Feeling restricted by the age limit may push you away from the idea of a traditional IRA.
Income restrictions could scare you off, but if you make less than $137,000 as a single filer or $203,000 as a couple filing jointly, you qualify for a Roth IRA.
Traditional IRAs earn you a tax break the year you make a contribution, which could be a major deciding factor for you. With Roth IRAs, however, you donâ€™t get a break when you put money in, but you will when you take money out.
If youâ€™re ready to start your Roth IRA, there are a few steps youâ€™ll need to take.
Your income is your biggest determining factor for eligibility. If you make more than $137,000 or you and your partner earn more than $203,000, then you wonâ€™t qualify. But even if youâ€™re close to those figures, you can still contribute a reduced amount.
If you earn less than $122,000 independently or less than $193,000 filing jointly, you are free to contribute the full amount for IRAs.
If you earn too much for a Roth IRA, consider alternative investment options.
Are you ready to take big risks to earn some big rewards? Or do you like to play it safe and earn with less risk? Your investment strategy should be catered to your personal preference and investment comfort level.
If you like to watch your investments every chance you get, an online stock broker like TD Ameritrade or Charles Schwab may be a good choice for you. Try to find a brokerage firm with low or no account minimums so you can start immediately contributing and growing your investments. Itâ€™s also important to consider trading costs â€” the costs can add up quickly when youâ€™re charged a certain percentage or dollar amount per transaction.
If you prefer to take a hands-off approach, you may want to consider a robo-advisor like Wealthfront or Betterment. Youâ€™ll complete a questionnaire that creates your investing profile and portfolio. With this approach, youâ€™ll also want to look for low or no account minimums and low fees.
There are plenty of places to put your money and lots of companies are vying for your business. Here are a few questions to ask yourself before opening a Roth IRA:
Once you have an idea of what kind of investment style you want to adopt, you can choose a company that is most in line with your style.
Roth IRAs can consist of any sort of investment you want, like stocks, bonds and mutual funds. With robo-advisors, itâ€™s usually a mix of a bunch of different kinds of investments so you have a well-rounded, diversified portfolio. Itâ€™s wise to maintain a diversified portfolio because putting all your money into one stock or one kind of investment can hurt you if the company tanks.
Make sure you have enough saved up for investments that are separate from other financial obligations, like your emergency fund. Once your emergency fund is squared away and your debt is handled, you can start to use your extra cash to invest. Investment money shouldnâ€™t be taking the money you otherwise need to use.
But investing doesnâ€™t end when you open an account. You should try to set up a contribution schedule to consistently add to your investment account. A good starting point is 5% to 10% of your net income. If thatâ€™s not doable, try to make auto-contributions every paycheck, month or quarter so your account is always growing.
IRAs and other retirement investment accounts are good ways to save for the long term. If a company is underperforming or the stock market takes a dip, donâ€™t fret. The market has a way of working itself out in the long run.
But that doesnâ€™t mean you should ignore it completely. Analyze your account every year. The time of year doesnâ€™t really matter, but it might be helpful to schedule it with something like the beginning of the year or around a specific holiday. You might not need to make any changes, but you may feel like itâ€™s time to be a little more conservative or risky based on your updated preferences. Youâ€™re probably not the same person you were a year ago.
Donâ€™t fret if youâ€™re still in the research stages of opening a Roth IRA. Look into companies that are most in-line with your investment preferences and choose investment types youâ€™re comfortable with. You want your money to grow over a long time, so try to find a place where youâ€™ll be happy for years to come.
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