Why the Roth IRA is My Favorite

Are you ready to retire? I imagine you’re saying yes… BUT you may think you don't want to retire just yet. Even if you love your job, there will prob come a time when you’re ready to call it quits and spend the rest of your days sipping cocktails by the beach and watching your pup do his fave thing in life - swimming.

Okay, so maybe that’s my retirement fantasy, but even if you’re not a toes-in-the-sand kind of girl, I know you’ve dreamt of what it will someday be like to be able to do whatever you want whenever you want. The thing is, we have to prepare for retirement. You may have taken student loans out for college, but there’s no such thing as a retirement loan.

Saving for the future now gives you the freedom to decide when that time will be later. It can be overwhelming to think about investing for retirement, so today I want to share with you my absolute favorite retirement account and why you should be investing in it today. 

What is an IRA?

Okay, so you may be asking yourself, “What is an IRA?” If you’ve never heard of the IRA, or even if you have but you’re still not sure exactly what it is, don’t worry. So many people are in your boat (in fact, like 200 people on my recent Instagram post said they had no idea what it is). 

An IRA is an individual retirement account (okay, technically “arrangement”, but we as a society have kind of taken over calling it “account”. I mean it DOES make more sense anyway, right?!) First, the I stands for the word “individual,” meaning that it belongs completely to you, and you have to go and open it from a place like Fidelity, Charles Schwab or Vanguard, among others. 

We can have a Roth IRA and/or a Traditional IRA. The Roth IRA is my favorite, and you’ll learn more about why today.

Here are some important callouts for both the Traditional IRA and the Roth IRA:

🤑 In order to qualify for an IRA, you have to be earning taxable income (sorry, friends, your under-the-table side hustle in which you don’t pay taxes to Uncle Sam doesn’t qualify). My married, filing jointly friends who stay at home with the kiddos - you have a special loophole!

🤑 You must meet the contribution deadline (which is one of the things I love about the IRA, and I’ll explain in more detail later in this post).

🤑 The contribution limit is $7,000 in 2024 if you’re under 50. If you’re 50+, you can contribute $8,000

🤑 There is an income limit of $161,000* if you’re single or $240,000* if you’re married and filing jointly to be able to contribute directly to the Roth IRA. If your MAGI is over this amount, you can’t contribute directly but could do a Backdoor Roth IRA. There is no income limit for the Traditional IRA.

*Income limits are for 2024

How Does a Roth IRA Work?

So let’s talk about my fave: The Roth IRA. Once you’ve met the qualifications for a Roth IRA, how does it work? So, you contribute after-tax dollars to your Roth IRA account. This means there really aren’t any immediate tax deductions or tax benefits for contributions into the account.

If you’re like, “Okay, Amanda, why the heck would I want to do that?!” stick with me here.

When your account is funded, you then invest your dollars. Over time, your invested dollars start making money – and then THAT money makes money. It can really start snowballing - doubling, tripling, quadrupling and before you know it, you’re sitting on the beach in Tahiti telling all of your friends about how that Instagram girl (that’s me 🙋‍♀️) taught you investing so you could retire early (but all that work was you, boo!)

Why the Roth IRA is my Favorite

Okay, so now that you have a better understanding of what the Roth IRA is and how the heck it works, let’s get to the good stuff - including the part about how not having any immediate tax deductions is okay, I promise!

The Roth IRA is my favorite for a few reasons:

Tax-Free Growth

When I invest money in my Roth IRA, I’m investing money I’ve already paid taxes on. So, while there’s no immediate huge tax deduction or tax break for investing in this account, I don’t pay any taxes on it when I pull my money out later.

So, someday, when retirement me is ready to withdraw the money and hit the beach, she won’t have to pay taxes on the money earned in the Roth.

For example:

• I invest $500 a month for 30 years.

• After 30 years, I would have $679,699 (assuming an 8% return on my investment).

• My contribution over 30 years is $180,000, the rest is all tax-free growth!

• So that means I paid taxes on the $180,000 I contributed, but I’ll never have to pay taxes on the $499,699 of growth! 

We want all of the tax-free goodness we can get! 😎

Flexibility

Roth IRAs are very flexible investment accounts. One of the biggest perks is that I can pull out my contributions at any time without penalty! I just have to wait until I am 59 ½ or 5 years invested on the gains. 

For example:

• I invest $500 a month for 10 years

• After 10 years, I would have $86,919 (assuming an 8% return).

• My contribution over 10 years is $60,000 and the rest is growth.

• I can pull from my contributions, $60,000, without penalty! Now you don’t WANT to do that, but it’s a nice comfort blanket knowing it’s there.

No required distributions in retirement

With 401k and traditional IRA accounts, the government doesn’t let me just hoard money. I have to pull from it in retirement, even if I don’t need it or if the market is experiencing a downturn. 

However, with a Roth IRA, I’m not required to pull any out at any time. It’s the ultimate wealth transfer vehicle! 🚗

Double dipping

Double dipping may be a no-no when it comes to chips and queso (although, I’m willing to let it slide), but when it comes to investing your money in retirement accounts, you want to double dip allllll day, baby!

The Roth IRA is amazing because it’s its own account! You can contribute to your Roth IRA and an employer retirement account like a 401k, 403b, 457,  a pension account or whatever your employer offers – at the SAME time!

Extended contribution calendar

With a Roth IRA, you have until the tax deadline to contribute for the previous calendar year. What does that mean for you? Well, if you still want to make contributions to your Roth IRA for the 2023 earning year, for example, you have until April 15, 2024 (tax day) to do so. That’s an additional four months to build your financial empire! 

No minimums

The longer you wait to invest your money, the fewer dollars you’ll have come retirement. I can’t stress enough how important it is to start investing, my friend! There are ZERO minimum contribution requirements with a Roth IRA. So, whether you have $1 or $1,000, you can get started investing immediately. 

Roth IRA Misconceptions

One of the biggest misconceptions about Roth IRAs is that your money is locked away forever. 

I totally get it! Does anyone else have a lil money trauma and is afraid that one day you’ll wake up and it’ll just be…gone? 💸

Now, don’t get me wrong—you don’t want to withdraw from your Roth IRA if you don’t have to. The only way you can earn growth on your investment, any type of investment account, is for the money to stay in your account and work for you. But for me, and I imagine for you too, just knowing if I needed to withdraw my money, I could without penalty brings me peace of mind. 

Start Today

I know it can be so easy to come up with a whole list of reasons why you can’t invest in a retirement account:

• You don’t earn enough

• You’re saving to buy a house

• You’re paying for your wedding

• You have student debt

• You may finally go back for that Master’s program

• Nordstorm is having a really good sale

Resist the excuses that keep you from saving money for retirement! Now is the time! Setting up a Roth IRA and contributing whatever you can (seriously, friend, even if it’s only $10…) will not only help you retire when and how you want, but it will also set you up for building generational wealth. You can’t afford not to do this!