Roth IRA Basics That You Need To Know

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Developing a plan to invest your money is essential. The best way to grow your wealth is to not only keep it, but keep it in a tax free account where it can grow. Taking advantage of compound interest as early as you can will leave you with more money in the long run. If you already have a retirement account with less advantages, you can rollover to a Roth IRA and start reaping the benefits.

What is a Roth IRA exactly?
Roth IRA stands for Individual Retirement Account. A Roth IRA is among one of the many tools you can use to build wealth for retirement and it’s one of the most popular choices for where to place your money. It’s important to note that this is different from your 401k. You can have a 401k in addition to a Roth IRA.

The requirements
To maximize your contribution, you need to make $112,000 per year in individual income or less than $175,000 per year of combined income. Another requirement is that your annual contribution can’t exceed your income for that year. Minors can even contribute to a Roth IRA, the contributions will be based upon the minor’s income. You cannot claim the contributions you make to your Roth IRA as a deduction on your tax return. You’ll need about $1,000 to open a Roth IRA account. The annual contribution is capped at $5,500 if you’re under 50. If you’re over 50, you can contribute $6,500. So, within the aforementioned limits, you can make a significant yearly contribution if you choose to. Unlike traditional IRAs, Roth IRAs don’t have Required Minimum Distributions or RMDs, which require you to make a withdrawal each year.

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A holding period
For a period of 5 years, you’ll need to hold off on making any withdrawals. The 5 year holding period begins on the earliest of three dates; when you made your first contribution, rolled over your Roth 401k, 403b or Roth IRA, converted from traditional to Roth IRA. If you’ve converted proceeds multiple times, you’ll need to keep track of each one individually for the full 5 years

Penalties
If you’re younger than 59 1/2 and you make a withdrawal, you’re subject to a 10% federal tax penalty. There are several exceptions to the rule, so you may want to look into the specifics if you’re thinking of making a withdrawal. The 10% tax doesn’t apply if you’re disabled, buying your first home, college education, unreimbursed medical expenses, among a few other situations.

How can it help you
Roth IRAs are a great way to grow your wealth tax free You can start growing your nest egg in your Roth IRA an any age. You get to pick the investments in your Roth IRA, unlike a 401k with pre-selected funds that paid the most to be on the menu of choices. The real reason why Roth IRAs matter and they’re so powerful is because of compound interest. Through the power of compound interest, $5,000 can snowball into $15,000 or more depending on the interest rate.

When you add money to your Roth IRA, you get to keep the interest. So if you add $10,000 and you have an 8% interest rate, you get to keep $800 the first year. Going into your second year, you’ll have $10,800 growing at 8%, leaving you with $11,664 at the end of your second year. As you can see, Roth IRAs are an excellent way to grow your money tax free. The longer you leave your money in the account untouched, the more you take advantage of compound interest and have more money for retirement.

When it comes to finances, many people are convinced that you can make significant amounts of money without great risk. The good news is, you don’t have to bet the whole farm to grow your wealth. You can contribute comfortably or make an effort to retire early with tax free funds. The higher your interest rate and the larger your contributions, the more money you will have for retirement. Remember that what makes compound interest work is time, so begin now with any amount you have.

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