Roth IRAs are powerful accounts that help you save for retirement and become tax-free millionaires, where the money you put in grows tax-free and you’re able to take it out without paying any of that to the government in the future. It is a great way to save for your future but there are some things you need to know before you open a Roth IRA if you are thinking about opening one of these accounts.
Let’s talk about some of the things you need to know before you get started.
Eligibility
First, you need to know all of the rules about who can actually open one of these accounts. Roth IRAs are individual retirement accounts and they do have a lot of rules about who can contribute, what they can contribute, and how much. Before you open one, you need to know basically if you’re eligible to even open one of these accounts.
Every year there are limits on the amount of money that you can earn in order to qualify to contribute to this account. You have to earn less than these limits that are set in order to contribute, and if you don’t there are ways around that. There are contribution limits for both single earners and married couples, so check those they change every single year.
What You Can do With Your Money
Speaking of rules, get to know all the rules about the account. Beyond just if you’re eligible to contribute, these accounts have a lot of specific rules and laws attached to them, so you need to know basically what is okay and what you are able to do with your money once it’s in there.
You’ll want to get into research mode with your Roth IRA and learn all of the different rules about these accounts. There are rules about when you can withdraw your money both when you are at retirement age 59 and a half, and also before that, there are some special circumstances where you can pull out your money.
You want to make sure that you’re doing everything about the book because there will be consequences if you’re not. The government actually makes this really easy, on the IRS website there are a lot of really easy-to-understand documents that will help you understand these accounts just read through them so that you know what you can do with your money, what rules exist, and how you can follow them.
Personal Tax Situation
Roth IRAs are amazing because you put in money that you’ve already paid taxes on. The money grows inside of the account and then when you’re eligible to pull it out you get to take that money out without paying taxes on it again.
This allows you to grow that money tax-free and it’s a huge benefit, but your personal tax situation might not benefit from this as much as contributing to something where you’re putting money in before taxes and then paying taxes when you take it out.
It really does depend on your personal tax situation, how much money you are earning now, how much money you expect to earn when you’re retired, and whether you’re paying taxes now or in the future. That is up to you to determine.
You’re going to want to take some time and learn about the pros and cons of contributing to a Roth IRA versus a 401K. Take some time to determine which one takes priority because maybe the Roth array is not the account that you want to contribute the most to right now. It really depends on your personal situation and no one on the internet can tell you what that is.
Definitely look at your tax situation before you open a Roth IRA and contribute to it, make sure that it is the right account for you and the one you want to prioritize.
Contribution Limit For The Year
Every single year, the amount that you can contribute to a Roth IRA changes. The max amount will go up over time but it does not go up every year, and you’re going to want to know before you open your account how much you can contribute for that year.
As an example in 2022, the max amount you could put in a Roth IRA was $6,000, in 2023 the max amount is $6,500 so it went up. The year before you could not contribute as much as the next year this is something that changes all the time.
Whenever you’re opening up your account make sure you know the rules for how much you can put in that year, and also if it’s early enough in the year if you can contribute for last year. If you are contributing before tax time, you can often contribute for the last year. You could put in for example that $6,000 if you’re contributing in March, you could put in$6,000 for 2022 and then put in $6,500 for 2023 which is amazing.
Definitely make sure you know the rules, when you can put in that money, and how much you can contribute.
Where to Open an Account
You’re going to want to make sure you choose a brokerage that is solid, you know that they are going to have good customer service access to good funds inside of their accounts, and anything else that you might need.
I have a couple of personal favorites like Vanguard, Fidelity, and M1 Finance, but there are others that are great as well. You can open an account at the place where you have your 401k if you’re happy with that just for ease of use, or you might want to try something new.
Doing a little bit of research into these brokerages where you can open a Roth IRA is going to help you make that decision and actually get started.
Contribution Plan
This is basically up to you, and it really depends on how much money you earn, how you save, and how you want to contribute to this account. It’s not 100% necessary to know this before you open an account but it is really something I would recommend just so you feel more confident about opening this account and putting money in upfront.
You might decide to take the amount that you can put in per year and divide it by 12 and then contribute every single month that amount. Maybe you decide to take that amount and divide it by 26 for your bi-weekly paychecks, or you divide it by 52 so you contribute a certain amount every week. You can try out a Roth IRA challenge with a random amount every single week or bi-weekly so that you’re able to put in the full amount for the Year.
By following one of these plans, just having that plan in place before you get started will make you feel more confident and it will make you more likely to actually max out this account and get the most benefit out of it.
What to Invest In
This is something that you can work on over time. Before you open your account, I highly recommend you pick at least one or two Investments so that you are not letting your money just sit in there without having access to an investment that will help your money grow.
You will want to do some research because you want to choose these investments wisely. You want to make sure that you’re taking some risk so your money will grow, but you also don’t want to take so much risk that your money disappears, or that you’re uncomfortable with the investment that you’ve made. If you panic and sell everything and lose your money, that’s not really going to give you any benefit to using this account.
Make sure you take the time upfront to decide what investments you’re comfortable with and want to use inside your Roth IRA. A Roth IRA is not an investment in itself, it’s just a type of account, you have to pick the Investments inside of your account. So before you open one, take a little bit of time, research some index funds or whatever you want to invest in, and decide what your money is actually going to be invested in inside of your account.
Your Beneficiary
The next thing I think you should know before you open a Roth array is who your beneficiary is going to be. No one likes to think about dying but it does happen and you want to have a beneficiary set in your account. When you open your account you can set this in your settings and just have someone that you are going to make sure your money goes to in case of your unfortunate passing.
This actually is something that will change probably over time. While starting out you could use your siblings or anyone you want if you’re not married yet, and you could change that later anytime. But having a beneficiary set will save a lot of headaches in case anything does happen to you which isn’t fun to think about.
But it is important to know before you open this account because you should designate a beneficiary.
** Bonus Tip
Those are basically the major things you need to know before you open an account but this bonus tip is really really important and honestly something that you should do. And that is to learn what the account you open can do, how it works, how you contribute money, and how you invest in something.
You need to make sure that you understand how the brokerage that you selected actually works with the account that you have. When you are contributing money to your account, you need to make sure that it’s actually getting invested with Roth IRAs.
Unfortunately, something that has sometimes happened to people is that they put money into the Roth array but they don’t select an investment. If your money is not earning anything it is losing its value, and that is the opposite of what you want to happen in your Roth IRA. So you need to make sure you understand your specific account, how it works with contributing money, and actually investing that money.
Do Some Digging
Take a little bit of time when you first open your account to look at how these things work inside your brokerage. It’s a little bit different from every brokerage, you’ll have to learn how it works on yours. There are a lot of articles and YouTube tutorials on how to actually contribute money and how to invest in specific things inside that account, just look for tutorials that are about the actual nuts and bolts of Roth IRAs.
Most brokerages also have a lot of frequently asked questions, tutorials, and step-by-step instructions, read up on those to know how your account works. That is a huge thing that you’re going to want to do so that you don’t make the mistake of not having your money go to the right place, or having a mistake that will cost you tens of thousands of dollars over the years.
That’s everything you need to know before you open the Roth IRA, I highly recommend these accounts and I’ve actually made a ton of different posts on them definitely check out this next one on Roth IRA vs Traditional IRA, it is something that you’re not going to want to miss. Peace and Happy Hustling!
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