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Credit Stacking Asks: What is a Roth IRA?

A big misconception for a long while is that you had to think about retirement when you were in your forties or fifties.

Basically, around that time you would start to think about retirement.

As we should know now, that’s a complete lie.

Thinking about retirement should honestly happen well before your forties, even your thirties.

But while thinking and planning for retirement is crucial, it’s also really confusing and can seem complex.

So I’m going to go over one of the most talked about, but probably least understood retirement investments - Roth IRAs.

What is a Roth IRA?

What exactly is a Roth IRA and how does it differ from a traditional 401(k)?

First, a Roth IRA is an investment account that allows you to take out the money, for free, when you reach retirement age.

One of the benefits of a Roth is that the money you put in is already taxed, so if you need to pull that money out, it will be tax free.

Roth IRAs can be used for several different investment options:

  • Stocks

  • Bonds

  • Real estate

  • Mutual funds

Not only can you pull out this money when you hit 59 ½ but the money continues to grow as you put money in.

So what’s the difference between this and the traditional 401(k)?

Putting money into an Roth IRA

For starters, most people get their 401(k)s through their employer, with some amount or percentage of their paycheck being put in each month or twice a month.

Some companies will match the amount that you put into your 401, which is great and just depends on the company you work for.

However, 401(k)s have a distinct downside of higher fees taxed against the money, usually 1-2%.

Guys, that’s 10 years of retirement income that is taken away from you!

Traditional 401(k)s will have hidden fees that most people aren’t aware of and cost people so much money.

That’s the reason you actually want to go with a Roth IRA.

401(k)s and Roths often get compared when it comes to the amount of money that might be taxed when you put money in or pull that money out.

Basically, if you think taxes will be higher when you reach retirement, it’s better to put that money in a Roth IRA, so it can grow and you can pull it out tax free.

If you think taxes will be lower, then it might be better to do a 401 and put in untaxed money and then pay the taxes when you pull the money out.

Personally, I believe – along with others – that taxes will be higher when we reach 59 ½, so we’ve put money away in Roth versus 401.

When to Pull Out Money from a Roth IRA

When going into a Roth IRA, you have to withdraw after the age of 59 ½ and there must be a five-year holding period beforehand.

A big downside to a Roth is the potential 10% early withdrawal penalty; so if you pull your money out before you’re 60, then you’ll get penalized.

Now there are cases where you might be able to pull money out before 59 ½ and before the holding period.

You avoid the penalties but are subject to the taxes once the money is out of the account.

The following situations are allowed to withdraw from a Roth IRA:

  • You use the money (up to $10,000 lifetime maximum) to pay for a first time home purchase.

  • You use the money for qualifying education expenses.

  • You use the money for qualifying expenses related to a birth or adoption

  • You become disabled or you pass away.

  • You use the withdrawal to pay for unreimbursed medical expenses or health insurance if you’re unemployed.

Other than the above, you’ll want to try and avoid pulling out money from a Roth because the whole point is to grow your money tax free for years.

That gives you the benefit of an accumulated amount when you do reach retirement.

If you don’t already have a Roth IRA, you can set up an account with either Interactive Brokers or Charles Schwab.

And that’s it, guys, that’s all to know about a Roth IRA. If you want to learn more about investing and growing your money and business, then come join our Credit Stacking community.

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