Why You Should Open Up a Roth IRA, Yesterday!

So you’ve finally got some money set aside and you are looking for the best way to use invest it. Look no further!

A Roth IRA is a type of individual retirement account (IRA) that allows you to save for retirement on a post-tax basis. Unlike traditional IRAs, where contributions are tax-deductible and withdrawals are taxed, contributions to a Roth IRA are made with after-tax dollars, and withdrawals in retirement are tax-free.

The importance of a Roth IRA lies in its unique tax benefits, which can provide significant savings over time. Because contributions are made with after-tax dollars, you won’t receive an immediate tax break, but the money you contribute and any earnings on those contributions will grow tax-free. This means that when you withdraw the money in retirement, you won’t have to pay taxes on it.

Another benefit of a Roth IRA is that there is no age limit for contributions, unlike traditional IRAs, which have a cut-off age of 70 ½. This means that you can continue to contribute to a Roth IRA well into your 70s, 80s, and even 90s, and still benefit from tax-free withdrawals in retirement.

Additionally, Roth IRA contributions can be withdrawn penalty-free at any time, for any reason, providing flexibility and liquidity in case of emergency.

Another important feature of Roth IRA is that, it is not mandatory to start taking required minimum distribution (RMD) at age 72, unlike traditional IRA. This means that you can leave the money in the Roth IRA to grow tax-free for as long as you want, which can be beneficial for those who want to leave a legacy for their heirs.

In Action

Peter Thiel is a successful entrepreneur and venture capitalist who used a Roth IRA to invest in early-stage startups. Thiel is known for being an early investor in companies such as Facebook, LinkedIn, and Airbnb, among others.

A Roth IRA is an individual retirement account that allows for after-tax contributions and tax-free withdrawals in retirement. The maximum annual contribution to a Roth IRA is currently $6,000 for individuals under the age of 50, and $7,000 for those 50 and older.

Thiel used his Roth IRA to invest in startups through a self-directed IRA, which allows for a wider range of investment options beyond traditional stocks, bonds, and mutual funds. By using a self-directed Roth IRA, Thiel was able to invest in the early stages of startups and potentially reap large returns, while still taking advantage of the tax benefits of a Roth IRA.

It’s important to note that investing in startups is considered high-risk and is not suitable for everyone. Thiel’s success with this strategy is largely due to his expertise and experience in the tech industry, as well as his ability to identify promising startups.

Additionally, not all self-directed IRA custodians allow investment in startups and private companies. It’s important to check with the custodian if they allow such investments and also to make sure that the investments are in compliance with the laws and regulations governing self-directed IRAs.

In summary, Peter Thiel used a Roth IRA to invest in early-stage startups through a self-directed IRA. He was able to take advantage of the tax benefits of a Roth IRA while potentially reaping large returns from his startup investments. However, this strategy is considered high-risk and is not suitable for everyone.

Example Scenario:

Let’s say Jane starts contributing $5,000 per year to a Roth IRA at the age of 22. She continues to contribute $5,000 per year until she reaches the age of 67, the age at which the IRS requires her to start taking required minimum distributions (RMDs) from her traditional IRA or 401(k).

Assuming an average annual return of 7%, by the time Jane reaches 67, her Roth IRA would have grown to approximately $1,167,000. Because contributions to a Roth IRA are made with after-tax dollars, and withdrawals in retirement are tax-free, Jane would be able to withdraw the entire $1,167,000 without owing any taxes.

In addition to the tax benefits, Jane also has the flexibility to withdraw her contributions penalty-free at any time, for any reason. This can be useful in case of emergencies or if she needs to make a large purchase.

It’s worth noting that $5,000 is the contribution limit for the year 2022 for individuals under the age of 50, and the contribution limit may change in the future. Also, an average annual return of 7% is just an assumption and the actual return will depend on the investment choices and market conditions.

In summary, by starting to contribute to a Roth IRA at the age of 22, Jane would have the opportunity to save a significant amount of money for retirement while also enjoying the benefits of tax-free withdrawals and flexibility. This example illustrates the power of starting to save for retirement at a young age and the benefits of using a Roth IRA as a savings vehicle.

How to Start a Roth Open a Roth IRA

Opening a Roth IRA account is a relatively simple process, and can typically be done online in a matter of minutes. Here are the general steps to follow to open a Roth IRA account:

1. Choose an IRA custodian: First, you’ll need to select a financial institution or brokerage firm to hold and manage your Roth IRA. Some popular options include Charles Schwab, Fidelity, Vanguard, and TD Ameritrade.
2. Gather information: Before opening the account, you’ll need to have some basic information handy, such as your name, address, Social Security number, and employment information. You may also be asked to provide information about your financial situation, such as your income and investment experience.
3. Complete the application: Once you have the required information, you can complete the online application. This typically involves providing your personal information and answering a few questions about your financial goals and investment experience.
4. Fund your account: After your application is approved, you will need to fund your account. This can typically be done by transferring funds from another account or by mailing a check.
5. Choose your investments: Once your account is funded, you can start choosing how to invest your money. You can select from a variety of investment options, such as mutual funds, exchange-traded funds (ETFs), and individual stocks.
6. Review and sign agreements: Finally, you will be asked to review and sign any agreements associated with your Roth IRA account.

Banks To Choose From

Here are some of the best banks to open a Roth IRA at, along with their fees and pros and cons:

1. Charles Schwab: Charles Schwab offers a wide range of investment options, low fees, and no account minimums. They also provide a number of educational resources and tools to help you manage your account. Fees: $0 for account opening, annual maintenance, and closing. Pros: Low fees, wide range of investment options, no account minimums, and educational resources. Cons: Limited branch locations.
2. Fidelity: Fidelity offers a wide range of investment options, no account minimums, and a variety of educational resources and tools. They also have a large network of branches for in-person support. Fees: $0 for account opening and annual maintenance. Pros: Wide range of investment options, no account minimums, and educational resources. Cons: Some funds may have high expense ratios.
3. Vanguard: Vanguard is known for their low-cost index funds and ETFs and they have no account minimums. They also provide a variety of educational resources and tools. Fees: $0 for account opening and annual maintenance on some accounts. Pros: Low-cost index funds and ETFs, no account minimums, and educational resources. Cons: Limited branch locations.