Roth IRA accounts are versatile tax-advantaged retirement account financial products that are funded out of pocket by you with your post-tax income.
Due to the fact that you fund Roth IRA retirement accounts with money you have already paid tax on, the future capital gains from your investments grow tax-free if you withdraw from the account after age 59 1/2.
However, you can always access the amount you have previously contributed at any time tax-free and without penalty so don’t think of the money as being locked away and you can not touch it.
One of the core tenants of our financial strategy is funding both myself and my wife’s Roth IRA accounts to the max (now $6000 x 2 = $12,000) every year.
We have been doing this for over a decade, and it is helping us towards our journey to financial independence and early retirement by forcing us to save that amount and invest it.
Contributing the Maximum Amount Yearly
Contributing the maximum amount allowable in your Roth IRA every year forces you to save money, invest, and fund your retirement. The practice of saving and investing for the future will allow you to grow your wealth into a freedom portfolio that could give you financial independence.
The main reason to fund this account every year is that all capital appreciation and investment profits grow tax-free. It is advantageous to consider taking advantage of this opportunity to the maximum amount you can afford.
Remember, you can always take out your contributions (but not profits) in an emergency, or for any other reason, at any time before the 59 1/2 age limit without penalty or taxes. So the money is not locked away and unavailable until you retire. You can access what you have saved at any time without penalty, although your investment may be down due to market volatility.
So if you are thinking of investing for the long term in the stock market, peer to peer lending, crowdsourcing real estate, or other long-term investment, do it inside a Roth IRA to avoid paying taxes on your returns.
Roth IRA vs Traditional IRA
Both Roth IRA and traditional IRA accounts provide great tax incentives but in vastly different ways.
Traditional IRA contributions are tax-deductible for the year you make your contribution on both State tax and Federal tax returns. You can claim this deduction every year you invest in a traditional IRA. Because of the deduction, the money is considered a tax free contribution so the capital gains are taxed upon withdrawal just like regular income when you take money out after retirement.
Roth IRA contributions are made with money you have already paid tax on and are not available to deduct from your yearly taxes. However, because the contributions have been made with money you have paid tax on already, the capital gains grow tax-free. When you reach retirement age, you can withdraw the profits tax-free.
Advantages of the Roth IRA
The Roth IRA is very versatile retirement savings and investment account that most brokerages offer now. The main advantages of Roth IRA accounts are the versatility and tax savings they provide to you and your family.
You will not be able to deduct the contributions to the Roth IRA account on your federal income taxes as you would with a regular IRA account, but because the income was already taxed before you contributed it to your Roth, all capital gains in the Roth account moving forward are tax-free.
Contrary to some opinion, you are able to access the contributions (not gains) without tax penalty before the retirement age of 59 1/2. You can withdraw the amount you have previously allocated without any penalty, but you will have to wait until you are 59 1/2 to withdraw any of the capital appreciation to avoid paying a penalty on those gains.
You can also withdrawal tax and penalty-free in the following scenarios:
You are over 59 1/2.
You use the withdrawal (up to 10k lifetime max) to pay for a first-time home purchase.
You become disabled or pass away.
You can pay for unreimbursed medical expenses or health insurance if you are unemployed.
Limitations of the Roth IRA
The Roth IRA is very versatile retirement savings and investing account. You can withdraw the amount you have allocated without any penalty, but you will have to wait until you are 59 1/2 to withdraw any of the capital appreciation to avoid paying a penalty on those gains.
Beginning 2019, you can allocate up to $6,000 per taxpayer to Roth IRA accounts.
Automate Monthly Contributions
The old standard contribution amount was $5,500, but as of 2019, you are able to contribute up to $6,000 for each taxpayer every year. You can contribute more if you are older and closer to retirement. Divide the total amount by 12 and have it auto drafted monthly into your Roth IRA so that it becomes automated. Have your contributions setup to enter your investments every month to dollar cost average your investment positions.
Front-loading Yearly Contributions
There have been studies to show that if you send in your yearly max in January of that year, effectively front-loading your contribution at the beginning of the year, your account has more time to make those funds profitable due to the long term nature of the Roth IRA investment.
What to Invest in?
Because this is a long-term investment, consider investing in a retirement year mutual fund that holds an appropriate amount of stock, bond, real estate, and cash exposure. Many brokerages offer these balanced retirement funds that rebalance their weighted exposure depending now how close to retirement you are. These retirement funds rebalance their allocations every year as you get closer to retirement.
I think Roth IRA investments should be a long-term set and forget style investment. Do not let daily volatility give you analysis paralysis.
I don’t think it is beneficial to swing trade or day trade the capital in your Roth IRA. It is better to let time and the market work for you. Just keep the contributions consistent and you will cost average into your investments inside your Roth IRA accounts.
Consider robo advisors like M1 Finance
Real estate crowdfunding like Fundrise
Peer to peer lending like Lending Club or Prosper offer Roth IRA products
Big name brokerage accounts from Fidelity, TD Ameritrade, Vanguard,
Self-directed IRA accounts that you can hold any type of investments including buy and hold real estate properties, private company investments.
Maximize Roth IRA Contributions Every Year Personal Story
For over a decade, my wife and I have funded our Roth IRAs to their yearly max. At first, it was hard to allocate that much. Initially it felt like we were locking away money that we could not use until we were old. Upon further education we realized the versatility and advantages of these accounts.
Sometimes we waited until the last minute (before tax in the next year) to send the funds in for the previous years maximum allowed amount. It can be tedious to stick with.
We are now setting up the contributions to be automated every month which makes it easier to maintain the discipline of constantly funding the Roth IRA accounts. The automation will deduct from our banking accounts every month into our Roth IRA accounts that will invest in a retirement dated mutual fund. Because this is at consistent intervals, we are cost averaging our investments automatically. This helps to eliminate the analysis paralysis of making investment decisions or timing the market.
Maximize Roth IRA Contributions Every Year Micro-action
Do further diligent research or talk to a financial advisor to consider opening and funding a ROTH IRA account at your favorite trusted brokerage. After you decide with Roth IRA provider is good for you, consider setting up a monthly transfer into your Roth IRA portfolio which will allow automation to keep your contributions consistent and therefore cost dollar average your investments on a monthly basis.
Maximize Roth IRA Contributions Every Year Risk Assessment
Roth IRA accounts are investment accounts so there is a varying amount of risk depending on how you allocate your investment portfolio. Talk to your financial advisor or Roth IRA provider to go over the risks for the investments you are considering. Do very thorough due diligence on your investment products before entering into any investment scenario. A good mixture of US and international stocks and bonds with a little bit of real estate, currency, and commodities are usually represented in Roth IRA portfolios. You may consider becoming more advanced and opening a self-directed Roth IRA account which will allow you to further expand your investments into buy and hold / rental real estate, or multi-family real estate, or any other financial product or business that you manage inside the self-directed Roth IRA account.
Maximize Roth IRA Contributions Every Year Disclaimer
Funding your retirement and understanding your retirement products is your responsibility. Cultivate Cashflow presents concepts and explores ideas for you to consider and do further research and ultimately after doing your own due diligence, decide if it is right for your family.
Cultivate Cashflow is not a financial advisor or advisory firm. We are an education and lifestyle blog who document our own financial and business practices as teaching and entertainment content.
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