Planning for retirement is a boring, adult-style subject. There is not a lot of excitement in talking about compound interest, long-term financial planning and investing for your future. Most youngsters would rather talk about SnapChat and other social media platforms.
But to ignore the subject in your 20s and 30s is a bad idea. What you need to do is learn as much as possible about a Roth IRA and other avenues for retirement savings. A Roth IRA is one of the best and most-used retirement investment vehicles out there. One of the reasons that it is so popular is that it is generally not taxed at any stage of its development.
A Roth IRA can be a retirement account for just one individual that contains holdings in securities, sometimes common stocks and bonds, but mostly in mutual funds. It can also be an annuity, which is purchased from a life insurance company.
Contributions to a Roth IRA are not tax deductible, which is very different from a traditional IRA. Withdrawals are tax free, under certain conditions. If you are over 59 and a half and you have had the account for at least 5 years, you are free to take out the money without penalty. The contributions are made to a Roth IRA from your after-tax dollars, which is why you get the tax-free holiday later in life, when you withdraw.
Roth IRAs are used by companies as benefit carrots to attract and retain top talent. They take the burden off companies from offering pensions or other defined benefit retirement plans and allow the employee greater control over their savings.
Who is eligible? Basically anyone under 59 and half and earns less than $118,000 per year. Married couples with a combined income less than $186,000 per year can contribute the maximum amount.
The Roth IRA is a great retirement plan for lower-earning employees that start contributing early in their career and do not miss the income from their check as they get older. They are used to their salary level. And they get to benefit from years of investment and compound interest.
One of the best aspects of a Roth IRA is that transactions within it, like capital gains, dividend splits and interest income, are not eligible to be taxed. That income is all yours. Also, you can take some money out of your Roth IRA to pay for a principal residence, provided you meet certain conditions, like not having owned a home for the past 24 months. Assets from a Roth IRA can be passed on to descendants and heirs.
One of the big disadvantages of a Roth IRA is that you cannot use the principal as collateral for a loan. So as a traditional asset, that aspect is not so helpful. And double taxation may happen at some point, if you are gaining income from foreign dividends or if you are a Canadian with a U.S. based Roth IRA.
And you have a cap on your yearly contributions to a Roth IRA, up to $6,600 at the top level.
But, all in all, a Roth IRA is a great retirement investment vehicle for young people and even mid-career employees. The tax benefits are there and so is the potential for years of compound interest to work its magic.
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