What is a Roth IRA? That’s why you’re here. Well, if you’re reading this post right now, congratulations! You’re officially as gullible as I am (which is quite an accomplishment, so kudos!) You probably clicked on this post due to the misleading urgency of the title, as I do when looking for personal finance advice. You’re likely looking for guidance on how and where to invest your coveted shekels for retirement.
WARNING: Although you will get valuable information from this post, it may not be the well-informed and specific financial advice you seek. In fact, after reading this, you may somehow be less informed on personal finance than when you started. Don’t ask me how that’s possible, but it is.
I used to be just like you; wide-eyed, optimistic, and naive. I wasn’t as chubby as you, but that’s your cross to bare, dude; not mine. I used to hear other guys talking about the value of their Roth IRA’s , and I thought “I don’t think I have one of those. I should ask the internet what it is, and then get one.” If I claim to be a man, then I have to do man stuff. Saving for retirement seems to be one of those things. As such, I set out to scour the earth (via ipad) to find out what Roth IRA’s are, how to use them, and if Wal-Mart keeps them in stock (alas, my local Wal-Mart does not, but check yours just in case.)
What I found during my research was a tortuous spider-web of misleading article titles, lists of anywhere between 6 and 27 reasons why I “Need a Roth IRA”, and online courses by financial gurus that will teach you everything you need to know, thereby rendering themselves obsolete. None of these things actually gave me what I was looking for; a straightforward explanation of Roth IRA’s and how to get started.
Frustration soon gave way to anger, which then gave way to bourbon. Buried in confusing financial jargon and soaked in Maker’s Mark, I came to a terrifying realization: NOBODY actually knew what a Roth IRA was, or how to use it! Don’t get me wrong. Everyone knew as much as I did: A Roth IRA was a financial thingy, and you could hold money there. Beyond that, it seemed to be a complete enigma to even the brightest financial minds in the world.
You may think I’m just being dramatic, but I did my due diligence. Every single article on the internet (that a 20 second Google search could yield) about Roth IRA’s used ambiguous language and ended with a suggestion to “PLEASE CHECK OUT THESE HELPFUL LINKS!” It was an exhausting experience. Nevertheless, I refused to be defeated. If a lack of knowledge didn’t stop me from getting a Master’s Degree, it sure as hell wasn’t going to stop me from learning about Roth IRA’s. At the end of my first round of research, I compiled the following useful bullet-points.
- Roth IRA’s are not the same as a Traditional IRA’s (I still wasn’t sure how they differed.)
- Roth IRA’s have tax benefits (I still didn’t understand what the benefits were.)
- I am an idiot for not having a Roth IRA (according to at least 1 of the article titles.)
After realizing that I hadn’t learned anything of value from my research, I knew I’d have to change my approach. It wasn’t good enough to simply do a 20 second Google search on such an important topic. I’d have to roll my sleeves up and sacrifice at least a few hours to really dig into the subject. 3 double-shot espresso’s (and 1 bad caffeine trip) later, I had the answers I was seeking.
For a financial illiterate like myself, it was not easy to pull out the pertinent information and cast out the useless. I had to read, read, and re-read a number of sources to comprehend the most rudimentary definitions and concepts within. Kind of like trying to read my wife’s mood when her words and her voice are communicating two completely opposite emotions (I SAID I’M FINE!) Eventually, some of the information started to make sense, after reading it multiple times from different sources. The following is a rundown of what I learned. I hope you find it helpful.
A Roth IRA is an “Individual Retirement Account.” It’s basically like a bank account that you can keep your investments in. It’s not an investment itself. It just holds your stocks, bonds, etc. that you already own. The purpose of an IRA is to supplement any other retirement income you will have after you retire. The main advantage of an IRA is that the profits you earn from the investments you house in the account can be either tax-free, or tax deferred (meaning you only pay tax when you receive the payout.)
I can see your eyes glazing over, so I’ll make it even simpler. Let’s put it in terms that the average 10-year-old (or 22-year-old millennial) can understand. Let’s say you invest all of your allowance (retirement savings) in Pokemon cards (stocks/bonds). The cards themselves are your investment. Now let’s say that your mom (Uncle Sam) reduces your allowance (collects taxes) whenever you leave the cards strewn all over your room, making a mess. In order to avoid having your mom take money from you, you have to store the Pokemon cards somewhere. So you buy a beautiful yellow plastic Pikachu briefcase (Roth IRA) to keep your Pokemon cards safe, thereby avoiding your tyrannical mother’s allowance theft (what a b!t@#.)
You still don’t get it, do you? And why are your eyes still glazed over? Are you reading my blog high? Dick move, bro. Try to stay with me. One of the most useful sites I came across in my research was ROTHIRA.COM. I’ve reposted a table from that site below, further explaining a few of the similarities and differences between a Roth IRA and a Traditional IRA for 2019. This is by no means all the information you need when choosing to open a Roth IRA, but it’s a solid starting point.
|2019 Contribution Limits||$6,000; $7,000, if age 50 or older||$6,000; $7,000, if age 50 or older|
|2019 Income Limits||Eligible are single tax filers with modified AGIs of less than $137,000 (phase-out begins at $122,000); married couples filing jointly with modified AGIs of less than $203,000 (phase-out begins at $193,000).||Anyone with earned income can contribute, but tax deductibility is based on income limits and participation in an employer plan.|
|Tax Treatment||No tax break for contributions; tax-free earnings and withdrawals in retirement.||Tax deduction in contribution year; ordinary income taxes owed on withdrawals.|
|Withdrawal Rule||Contributions can be withdrawn at any time, tax-free and penalty free. Five years after your first contribution and age 59½, earnings withdrawals are tax-free, too. No withdrawals required during account holder’s lifetime; beneficiaries can stretch distributions over many years.||Withdrawals are penalty free beginning at age 59½. Distributions must begin at age 70½; beneficiaries pay taxes on inherited IRAs.|
|Extra Benefits||After five years, up to $10,000 of earnings can be withdrawn penalty-free to cover first-time home-buyer expenses. Qualified education and hardship withdrawals may be available without penalty before the age limit and five-year waiting period. These may be taxed.||Contributions lower taxpayer’s AGI, potentially qualifying him or her for other tax incentives. Up to $10,000 penalty-free withdrawals to cover first-time home-buyer expenses, but taxes due on distributions. Qualified education and hardship withdrawals also available.|
Once you’re able to cut through a lot of the technical speak, the subject isn’t quite as complicated as it seems on first glance. I hope this information is as helpful to you as it was to me. I find financial planning to be one of my biggest challenges in adulthood (along with breaking my Oreo addiction and “talking yardwork”.) Trying to learn about retirement and other financial tools can be stressful. It can bring up feelings of anxiety and inadequacy. However, that shouldn’t be a deterrent. The most valuable thing I learned through this experience is to not be afraid of what you don’t know.
Chances are, a lot of other people are as clueless as you are. Whether you seek out the information for yourself, or get it from someone who already has the knowledge, there’s always a way to learn what you don’t know. In order to help you get started on your own journey of retirement planning, PLEASE CHECK OUT THESE HELPFUL LINKS!
For another funny post about stumbling into manhood, read How To Order A Cocktail Like A Real Man.