Have you heard your friends, family, and even people close to your age talk about investing? As a peer financial coach, I have been asked several times about the topic of investing. And while I would also encourage you to read our previous blog, Learning How to Invest, to understand how to create a strong foundation for investing, I would also like to dig a little deeper into the retirement investment world. Most college students would agree that they don’t have a lot of “extra” money, but you might have more than you thought if you review your spending habits and intentionally delegate some money towards your savings. And one location where you could save some of those funds could be in a retirement Roth IRA.

So, What is a Roth IRA?

A Roth IRA is an individual retirement investment account that allows a person to contribute or add after tax dollars to an investment vehicle. Once the individual reaches retirement age, they can withdrawal the principal and interest tax free.

How Do you Open a Roth IRA?

You can control your Roth IRA by yourself, with some guidance of online professionals, or you can have a professional do it for you! Brokerage services and many wealth management and financial institutions allow free or inexpensive Roth IRA account setups. Your bank may even have some options for you to explore. You can simply start the Roth IRA yourself or go to a professional who will give you more insight and knowledge on exactly what your options are.

What are Advantages and Disadvantages of a Roth IRA?

The first advantage is that you can pull contributions (principal) out tax free at any point. Another advantage to a Roth IRA is that it has no hinderance on the age of the person, meaning you can contribute to the account if you meet the qualifying earned income at any age, although minors do have to have a custodial account opened by a guardian until they reach 18. A third advantage to the Roth is the ability for continuous growth. There is no mandatory withdrawal date which means you can keep your money in the investment vehicle even during retirement. One last advantage of the Roth IRA is the flexibility of it. It allows a person to avoid any early withdrawal penalties for certain situations such as paying for higher education, first time home purchase, medical expenses, disability claims, health insurance, and countless others.

You may be thinking to yourself, “man this is great! The Roth IRA is perfect, and you can’t go wrong with it!” Even though it is a great resource, there are still some imperfections and fine details that you should know before committing to the Roth IRA. One disadvantage to note is there is income rule when it comes to contributions. If a person’s income exceeds the income range for that particular year, that person is unable to contribute to the Roth IRA. Like other retirement accounts, there are rules on when you can pull your money out of the account. One of the disadvantages to Roth IRA is the five-year holding rule and the rule where you must be at least 59 ½ years old. The five-year rule makes it so a person must have held the account for 5 years or more and have met the age requirement of 59 ½ years old before making any tax-free withdrawals. Another disadvantage to the Roth IRA is the annual limit to the contributions. Although other retirement accounts have annual contribution limits, the Roth IRAs tends to be lower. The current contribution limitation for those under the age of 50 is $6,000, and it is $7,000 for those over the age of 50. Along with the age contribution limit comes the annual income limit. After an individual hits $130,500 or more and a married couple hits and annual income of $205,000 or more, the contribution limits start to decrease.

Being new to the Roth IRA account myself, I couldn’t tell you about the process without informing you of some important, but basic, steps.

1. Prayer, Trust, Faith
   1. First, before setting up a Roth IRA, pray about it. Dive into Gods word and seek His and other trusted people’s wisdom. Knowing that God is in control and trusting Him is important in the ups and downs of investments.
2. Research
   1. Make sure you fully understand the tool before committing your resources to it.  Understand your risk tolerance and correlate the aggressiveness of the account.
3. Commitment
   1. Lastly, when you are setting up any type of investment or retirement account, commit to contributing funds for the long term.

If a Roth IRA is still attractive to you after learning just a little more, prioritize researching even more to see if this is the best path for you. You may even want to sit down with a financial professional and discuss your options. Or, if you are an IWU student, and you are interested in learning more, schedule a meeting today with your IWU NEXUS Coach.

Resources:

Schwab.com, C. S. (2022). Roth IRA withdrawal rules. Schwab Brokerage. Retrieved October 11, 2022, from https://www.schwab.com/ira/roth-ira/withdrawal-rules

Sam Swenson, C. F. A. (2022, October 11). 4 Roth IRA mistakes you don’t want to make. The Motley Fool. Retrieved October 11, 2022, from https://www.fool.com/retirement/2022/10/11/4-roth-ira-mistakes-you-dont-want-to-make/?source=eptyholnk0000202&utm_campaign=article&utm_medium=feed&utm_source=yahoo-host