Retirement

Roth IRA: Check Out This Amazing Investment Tool

No matter your age, if you are thinking about building a secure retirement plan, nowadays, one of the best investment tools is the Roth IRA. 

Why is Roth IRA such as excellent investment vehicle, especially for young investors? Because it allows you to grow your money in the long-term and TAX-FREE.

But before anything else, one thing must be clear: a Roth IRA is not an investment! It is just an account that gives you tax benefits, that’s all! 

The previous idea can never be forgotten for those who are not familiar with the term. Roth IRA is just an investment tool; This means that once the money is in the account, it is entirely up to you to make a profit in the long-term and to choose in which place you want to allocate your capital. 

 

 

What Is Exactly a Roth IRA?

A Roth IRA is an individual retirement account (IRA) that allows you to have tax-free in your capital growth and trading capital, and tax-free money in your future withdrawals under certain conditions.

When you open an account in a Roth IRA, the capital that you invest in must be after-tax money, and the money contributed to this investment tool is not tax-deductible.

The main benefit of a Roth IRA compared to a standard IRA is that once you start withdrawing your funds, it is 100% tax-free. Also, every trade you have and the capital growth you have experience is ALL TAX-FREE MONEY. All these Roth IRA’s features make it a powerful tool when it comes to taking advantage of compound interest.

 

 

Some Potential Advantages Of a Roth IRA

-You only pay taxes before the contribution to the account. All future capital growth and fund withdrawings are tax-free money.

-It is the perfect investment tool if you are confident enough to make your capital have a positive growth over the years.

-Almost every single brokerage institution and every financial institution offers this investment tool.

-There is no required minimum contribution (vs. Traditional IRAs & 401K.)

-There is not an age-limitation. 

-Every investor can contribute at any age as long as the account holder is earning income (tax-income).

-You can provide the money that could come from your divorces, such as child support or settlement.

 

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Some Potential Disadvantages of a Roth IRA

There are certain limitations regarding the number of your contributions (this amount changes regularly along the years):

-If you are a single investor who makes over $139,000 a year, you cannot contribute to a Roth IRA.

-If you are contributing to a Roth IRA as a married couple, the established earning limit to be able to participate is $206,000.

-The contribution limit is $6,000 a year when you are under 50 years old.

-The contribution limit if you are over 50 years old is $7,000.

-All Roth IRA contributions have to be done through cash (checks included). That means contributions cannot be made through securities or other financial assets, capital gains, rental income, or interest income.

-You can only contribute as an individual when your money comes from earned income, such as salary, wages, commissions, or bonuses. 

 

 

Some Investment Options In a Roth IRA

-Growth Stocks.

-Income-Oriented Stocks.

-Mutual Funds.

-Corporate Bonds.

-Real estate investment trusts (REITs).

-ETFs.

-CDs.

-Commodities.

 

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In Which Places You shouldn’t Invest Your Money Inside a Roth IRA? 

Unless you have the mindset, skills, and proven system to know how to trade high-volatile assets, you shouldn’t invest in certain places with the capital inside of a Roth IRA.

Another reason to think twice before investing in some places with a Roth IRA could be the limitation of $6,000 per year; this investment tool doesn’t allow you to redeposit if, for instance, you have lost in one single trade position the entire contribution for that year.

  1. Penny Stocks: usually, a penny stock is a stock trading under five dollars per share, and most of the time, they are traded in OTC (over the counter) markets. So trading or investing in these assets in your Roth IRA could not be the smartest idea.
  2. Cryptocurrency: crypto is high risk and high-volatility asset, so when it comes to investing in crypto with your Roth IRA, you can have the same dilemma as with penny stocks. However, you could consider investing a small percentage as a hedge, but only you should do that unless you know what you are doing.
  3. Short-Term Bonds: Roth IRA’s idea is a Tax-Free Money Vehicle for long-term investors who want to capitalize over time thanks to compound interest; it has been made thinking for retirement, mainly. Theoretically, it doesn’t make much sense to think about short-term assets that could pay so little in interests.
  4. Annuity: no matter what kind of pension it is, this investment option already gives you ‘tax deferral’ but also it comes with a cost. So considering this, what is the point of investing in an annuity when you already have your capital inside of a tool that offers your tax-free money? It doesn’t make much sense.
  5. Cash: the idea of Roth IRA is growing tax-free money for your retirement with the power of compound interest, so having a significant amount of sleeping cash in your Roth IRA account doesn’t make much sense either. 
  6. Money market funds and CDs that don’t generate much interest.

 

 

Conclusion

When it comes to investing in the long-term for your retirement through a Roth IRA, you must be looking for investments, dividends, or interests that generate substantial growth and capital appreciation over time.

If you don’t have the proper financial literacy to know how to make:

-The appropriate asset allocation.

-Appropriate money management.

Proper risk management.

-To set up a suitable investing or trading system to help you reach out to your retirement plans.

It is a good idea to find the right financial advisor who understands your investor profile, risk aversion, priorities in life, and your financial and retirement goals. 

 

If you still didn’t get the chance to read my previous article about building wealth through budgeting and four myths to avoid, be free to read it in the next link: Building Wealth Through Budgeting and 4 Myths To Avoid Today.

 

 

Don’t hesitate to reach out to finance.stoicism@gmail.com

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