Roth IRA - Everything you need to know

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You probably heard a lot of people say that the first step in investing is to open up a Roth IRA. Well what is it and why should you open one as your first investment?



What is a Roth IRA?


Roth IRA stands for Roth Individual Retirement Account.


Established in 1997, it was named after William Roth, a former Delaware Senator. When you hear people say to invest in a Roth IRA, it doesn’t mean that you’re buying a Roth IRA. A Roth IRA is basically a retirement account where you can buy different investments such as stocks, ETFs, Mutual Funds, and CDs. It’s kinda like a checking or savings account where you can put money in it, but you can actually buy investments.


Where can I open a Roth IRA?



There are many brokerages out there that have Roth IRA accounts available. Your bank probably also offers one. But, If you want to go with something more established, TD Ameritrade and Charles Schwab are great options with good customer service and have decent apps so you can trade on the go.




Key Points


1. It's Tax Free on Capital Gains

The main difference between having a Roth IRA and a Traditional IRA is how you get taxed. For a Roth IRA you are taxed upfront when you deposit your money, but not on any capital gains you make from your investments when you take your money out.


So if you invest a thousand dollars into a Roth IRA and it grows into ten thousand dollars, you made a $9000 profit. When you take out your profits at the age of 59 and a half, it’s totally tax-free! That means that you don’t have to pay something like a $2000 tax if you were to invest in another type of investment account. Amazing right? Hopefully, you're watching this when you're young and by that time that you're older, you're gonna have a ton of compounded money waiting for you completely tax-free.


2. You can withdraw your contributions

Now unlike most retirement accounts, it’s easy to withdraw your Roth contribution. That means if you deposited $1000 and you make $9000 you can take out the $1000 you put in but not the $9000 capital gains until your 59 ½.


3. Limitations

So how much money can you deposit in a Roth IRA, As of 2020, you can contribute up to $6,000 a year. If you’re 50 or older, you can contribute up to $7,000 a year. Of course, this is the downside of investing in a Roth IRA because you’re limited to how much you can put into the account each year. They do this because they know a lot of people are going to take advantage of getting tax-free money.

What should you buy in a Roth IRA?

You can treat your IRA the same as a regular cash brokerage account. You can buy and sell stocks, ETFs, and mutual funds. You can even day trade, swing trade, or options trade.


If you are just starting to invest and are completely new to it, ETFs are generally safe and conservative. Some popular ones include SPY, QQQ, VOO, and VTI. Depending on the brokerage you go with, they usually have ETFS that track the S&P500, which is kinda like buying a basket filled with a little bit of all the top 500 companies in the US.


As a beginner you can consider allocating 67% of your portfolio in ETFs and 33% in Fundamentally Strong stocks like Apple, Microsoft, Mastercard, Visa, Amazon, Waste Mangement, Square, and AMD to name a few that I like.



How can you Withdraw your Money?

One thing that many people might not know is that you can always withdraw your initial contributions with no tax or penalty, even if you are not over 59 ½. Because you’ve already paid taxes on it, the IRS does not place restrictions on when you can withdraw your initial contributions.


If you want to withdraw more than your initial contributions, like withdrawing some of your earnings, it’s a little different. To withdraw earnings tax-free, you must have opened the Roth IRA for more than five years, and you must be older than 59 ½ years old. There are a few exceptions for cases like using the money for a first-time home purchase or if you have a permanent disability. If you are younger than 59 ½ and you don’t meet certain requirements, you’ll have to pay income taxes and an early withdrawal penalty of 10 percent.

However, a Roth IRA is intended to be a retirement savings vehicle, with the huge benefit of tax-free growth. That growth will continue as long as you leave your contributions untouched (and continue contributing regularly). If you withdraw the savings before you reach retirement age, you’re losing the value of saving for retirement.

Conclusion

So now that you opened a Roth IRA, what more can you do to grow your money through investing and trading in the stock market? If you want to know how to use your Roth IRA to generate monthly passive income ranging from $800-$8000 a month, join our Level 1 membership where we teach you how to sell covered calls and cash-secured puts. We give you all the strategies and step by step instructions every week so you don’t have to.