WTF Is A Roth IRA? We Demystify Saving For Retirement


You know somehow it's important but what exactly is a Roth IRA?

Raise your hand if you have put off thinking about retirement? I see you! We all know saving money for the future is important but it's also a little confusing of how to start. In high school, I was required to take home economics but never taught what a 401(k) was. Now, I have to learn about retirement on my own, and I still can't make a decent pastry (I didn't do well in the class). There are a few different options to look into and what you pick will depend on a few factors, like if your employer matches your contributions. Here are the basics you should know

WTF Is A Roth IRA?

A Roth IRA (which stands for individual retirement account) is an account you can open yourself and contribute towards. The Finance Girl breaks it down, with the key takeaways being that there is no employer matching (since it is your account) and that you are NOT taxed when you withdraw from this later.

You don't get taxed down the line because when you make the contributions, you have already paid the income taxes on it. So what are the benefits and cons? A few things to consider is if you see yourself being in a higher income tax bracket in the future compared to now.

If you go with a different kind of retirement account, you will be taxed when you withdraw money and you could be taxed higher if you move up in the income bracket later in life.

Another advantage of a Roth IRA is (but not interest) tax and penalty free, although that is a serious financial decision to make. The dollar amount of contributions you can make is much lower, though.

For people under 50, you can only contribute up to $5,500 where those 50 and over can contribute $6,500. Is this a good idea for you? Maybe! If you don't have a traditional employer or 401(k) to contribute to, this allows you to start saving anyway. With as many as of the workforce freelancing in some capacity by 2020, having a savings account that doesn't rely on an employer is a necessity for some!

WTF Is A 401(k)?

A 401(k) is a company sponsored way of saving for retirement. The money that goes into these accounts come straight from your paycheck before taxes are taken out, which means you will be taxed when you withdraw during retirement. The huge advantage here is that you may have a company that matches your contributions! Say your company matches up to 3%. If you make $100,000 (go you), your company would match up to $3,000 that you deposit.

You can contribute past that until you hit the maximum contribution limit, your employer just won't match past the initial $3,000. But still, that is FREE MONEY. What are some of the cons of a 401(k)? You for withdrawing from your account early and will still have to pay the taxes on your withdrawal. Now we know how the guys feel when they get in trouble for pulling out prematurely (yes, that was a sex joke but how boring are finance articles usually?)

You may even want to have more than one kind of account. Plus, those two aren't the only kinds. There is company-sponsored Roth 401(k), solo 401(k), IRA, and others to investigate but the two above are common ones to look into. Regardless of what kind of savings you pick, make sure you make regular contributions. Even if you can only throw $20 in one month, those small amounts add up quickly and you'll thank yourself later when you're enjoying retirement on a beach somewhere!

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