Why should you open a Roth IRA?
Most of my posts contain a reference to a Roth IRA. It’s my favorite type of investment account.
If you’re brand new to investing, this is the investment account you want to open and start buying stocks in. With a few exceptions, this is the account that is going to allow you to compound your wealth without paying taxes.
Quite simply, a tax-free Roth IRA is an enormous financial gift from the government.
Taxes may just be an afterthought to you now, a sort of necessary evil, but believe me, once you start investing and building this stockpile of cash-producing assets in your investment accounts, you are going to feel extremely salty when Uncle Sam comes sniffing around for his cut.
Let’s say at age 25, you start putting $100 every week into your IRA. Let’s say you invested well and earned a 10% total return on the stocks you bought, which is just the historical average stock market return.
When you reach retirement age, you’ll have $1.4 million dollars. $1,459,416.24, to be exact. If it’s a traditional IRA (or 401k), get your checkbook out, because every time you withdraw, you owe taxes.
If your investments are in a Roth IRA, that money you’ve carefully accumulated is all yours.
Every. Last. Dime.
Because you already paid taxes on the money or assets in your Roth IRA.
You paid your taxes when they were withheld from your paycheck! Done and done.
Say you wanted to pull all that money out of your Roth IRA when you retire. Doesn’t matter why: to travel the world, to buy a couple apartment complexes, to roll around in the cash naked. (It’s yours, you can do whatever you want. I’m not judging.)
In a traditional IRA, at today’s tax rates, you’re going to owe $542,939 in capital gains tax on your money. Over half a million dollars. You aren’t even a millionaire anymore after the US government gets ahold of you.
With a Roth IRA, when you withdraw, you’re left with the exact same amount you’ve accumulated.
Now, most people don’t withdraw it all at once. It’s retirement money; it’s going to have to last you until you die. If you take out a bit at a time, it puts you in a much lower bracket than if you have to claim $1.4 million dollars as income in a single year.
But still. $0 in tax trumps any other positive number.
This is an enormous advantage to have. If you’re serious about building an empire, your Roth IRA is where you want to do it.
If you aren’t convinced yet, here are other advantages to opening a Roth IRA:
While I don’t recommend tapping into retirement funds for any reason other than the fact that you’re retired, your contributions to your Roth IRA can be withdrawn with no taxes and no penalty before retirement if you absolutely must. A traditional IRA or 401k will cost you taxes plus a 10% penalty.
The earnings and contributions in your Roth IRA can be used to fund higher education for yourself, your spouse, or your children without paying taxes or the 10% penalty.
If the money in your Roth IRA outlasts you, your heirs also do not have to pay taxes on the money you leave them.
This is tax-free, generational wealth you’re creating, folks.
You can continue building your Roth IRA to infinity. With a traditional IRA, you must stop making contributions and start withdrawing the money by age 70 ½….because Uncle Sam is tired of waiting on his money.
With a Roth IRA, you’ve already paid your taxes. This means if you have income from other sources (Social Security, pension, 401k, rental properties), you can keep stacking your Roth IRA sky high, or just leave it intact and let it keep growing (by this time in retirement, the assets within your Roth IRA are probably going to be growing at an alarming rate because of the compounding).
Your 401k may be beneficial for receiving a dollar-for-dollar match from your employer for retirement. Beyond getting the match, though, 401ks are generally full of sickening fees and a limited selection of sometimes poorly performing investments. For more on how awful 401ks can be, check out 401ks Are Where Dreams Go To Die.
What you need to know before you open your Roth IRA:
You must have earned income to contribute to an IRA. You don’t have to work full time or work for the entire year, but you do need taxable wages to be eligible for this type of investment account.
For 2017 and 2018, you can contribute a maximum of $5500 to your Roth IRA annually, or $6500 if you’re over age 50.
If you or your household is higher income, you may not be able to contribute the maximum to your Roth IRA or even at all.
If you are high income, be sure to check to see how much you can contribute to your IRA before making it rain in there! You can learn more on the IRS website.
Remember that IRA stands for individual retirement account. That means you and your spouse each have to have your own IRA, and you cannot have a joint IRA.
This is great news though because you and your spouse can each contribute the amount you’re eligible to contribute to your own IRA, which basically doubles how much you can shelter and grow tax free!
Also, if your family contains a stay at home parent and you’re legally married and filing jointly, both spouses can contribute to their own IRA with their own separate limits even if only one spouse has earned income. Thank you, equality!
Keep in mind that this tutorial is to open a Roth IRA that you use to choose and buy your own investments, as I teach you how to do in Zero to Investor. Your contributions to this type of account will not be automatically invested for you.
Once you’ve determined that you do want to choose your own stocks, bonds, and funds, start the tutorial. Be sure to also read Bottom Up Wealth’s disclaimer.
Tutorial: How to open your Roth IRA
Below you’ll find step by step instructions for opening the Roth IRA I recommend, which is at Ally Invest (formerly Tradeking). I recommend Ally Invest because they have the lowest trading fees out there, which is absolutely crucial if you’re serious about building a passive income empire!
In order for this investment account to be free of maintenance/account fees (which you know I hate), they require you to place one trade per year. If you are takingZero to Investor,I will be teaching you how to do this. 1 trade per year will be a piece of cake. For more on their fees, you can click here.
Before you start opening your Roth IRA, you’ll need this info handy:
- Your social security number
- Your employment info
- Your spouse and children’s social security numbers (for beneficiary information)
- Your bank account/routing numbers (whichever one you’ll use to fund your Roth IRA)
I highly recommend using a desktop to open your Roth IRA for 2 reasons:
a) As I was filling out the application it was a bit glitchy on my phone, and
b) If you open this on your desktop, then click the button below, you can refer to your phone for the step-by-step instructions!
If you need more help or you’re a visual/auditory learner, just click the short video beneath each step for further explanation!
Set up account or log in
If you’re already an Ally Bank or Ally Invest customer, be sure to log in rather than create an account. That way, all your accounts will appear when you log in to your app!
Pretty self explanatory.
In order to contribute to a Roth IRA, you or your spouse must have taxable earned income. Enter your employment information.
Then they want to know whether you are a person in the securities industry who is required to report your trading activity. If you or your immediate family aren’t, you’ll probably say no.
You’ll just want to enter a range for your income.
Your net worth will include your home, your rental properties, and anything else of value.
Your liquid net worth is anything that can be turned into cash quickly. Your home and rental properties would be excluded from this. Liquid assets would include any stocks, bonds, savings accounts, and assets that you could quickly sell for cash.
Then they’ll ask you about your trading experience. It’s okay if you don’t have any!
Sometimes people are confused by this section. Don’t be nervous! This is Ally Invest conducting their market research.
The answers you select will not change the functionality of your account, since for this type of account, you are choosing and buying your own stocks, bonds and funds. Most people are looking for a mixture of growth & income, but choose whatever seems right for your goals.
Time horizon just means how long you’re going to hold your investments before you cash out. If you’re learning how to buy stocks inZero to Investor,we use a long term time horizon. Since a Roth IRA is a retirement account, that’s most likely your time horizon as well! I don’t recommend investing funds you need in the short term.
This goes back to how accessible you need these investments to be. Again, if you’re investing for the long term, you’re not going to need your investments to be very liquid.
Risk is relative and we learn a lot about different investment risks in Retire Wealthy. There are risks associated with the stock market, sure, but there are also risks associated with investing too conservatively and your money not growing enough.
I don’t use these or teach them. Unless you plan to learn them near term, the easiest thing to do is to select no and add it later when you decide to start dabbling in them.
You’re required to choose a beneficiary for your account! Sometimes people want to skip this part, but take a minute to do it. You’ll save your loved ones a lot of headache should the worst happen to you.
A huge benefit to your Roth IRA is that upon your death, the wealth you’ve created within your Roth IRA can continue to grow tax free for your spouse or your children, if they inherit it directly from you! We cover this more in Retire Wealthy.
Note that if you’re married, you must choose your spouse as your primary beneficiary, unless you obtain a signed statement from them that they’re okay with you naming someone else.
Then you read the disclosures, accept the standard agreements, and electronically sign your application.
After your account is open, set up an electronic transfer to your new Roth IRA, and then set a comfortable amount on autopilot to set yourself up for success!
Make it rain
The more money you can set aside to invest in your Roth IRA, the more wealth you can build tax free! You can contribute up to $5500 per year to your Roth IRA, or $6500 if you’re over age 50. Make it rain as hard as possible in this account…this is an enormous gift from the government!
Congrats! You’re now the owner of just about the best investment account on the planet!
Keep in mind that simply opening this account is not enough. You need to contribute regularly, then buy your investments!
Start by prioritizing and trimming your expenses, and you’ll be shocked at what you can contribute to building your empire.
Then, learn how to buy stocks in Zero to Investor!
The information in this class or any part of this class is not intended as a substitute for personalized, professional investment advice. Neither Alanya Kolberg nor Bottom Up Wealth LLC is not a registered investment adviser. Your individual investment performance can vary. Historical performance is never a guarantee of future results.