Roth IRA: The great way to invest for low or medium income folks!!


401 (k) and Roth IRA are two traditional vehicle for contributing to retirement account. While to participate in 401(k), one needs to be working with a company that offer 401(k) to its employees. However, does not matter employed or unemployed or self-employed, one can always participate in Roth IRA.

Check this for the details :

1. All the contributions are after tax. That means you will add the money to this account from your take home salary or earnings.

2. Once you are at age 59.5 or more, you can start with draw without paying any tax. This is one of the most convenient quality of Roth IRA. No body knows what will be the future tax rate, so this will give a good idea how much money you can safely withdraw in retirement. For example, if my Roth IRA has $1 million at age 60, then I can safely withdraw $40,000/year for 20 years without worrying about paying taxes.

1. Not everyone is eligible to contribute to Roth IRA, this is  mostly for low to mid-level earners. If your salary is above $139,000 or Married couple with combined income above $206,000, then you cannot participate in it.
2. For year 202, the contribution limit is capped at $6000 (age under 50) and $7000 (above 50). To contribute, you can dump all $6000 at the beginning or end of the year, or just add $500/every month.

1. One of the greatest flexibility of Roth IRA is that you can withdraw your contribution amount any time before I reach age 59.5. For example, if I contribute $6000/year for 3 years, then my total contribution is $18000. Now on year four, suddenly I need some money, I can withdraw the entire $18000 or less without paying any penalty or tax. Other type of accounts like 401(k) or IRA will impose a penalty and tax for any early withdrawal.

How to start:
1. You can contact with your bank if they offer opening of Roth IRA
2. More convenient is to open with online/physical brokerage like Vanguard, Fidelity, Schwab etc.

Now again, like any investment, the earlier we start a Roth IRA the better.

For example, If I started at age 25 and my target retirement date is 60, I have 35 years to grow my investment. To keep this simple, if I invest ($500/month) in a S&P 500 index fund and get an average 8% (after inflation), then at age 60, I will have around $1 million. 

As for Roth IRA money, I will not pay any tax, so its much easier to plan for traditional retirement or early retirement.

Disclaimer: This article shows my personal opinion and its for entertainment purpose only. This is no way professional financial advice. You may seek professional advice or conduct own research before investing.

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