Explaining What a Roth IRA is And How To Open An Account

by Daniel | Last Updated June 20th, 2021

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So today I am going to talk to you about what a Roth IRA is, how you can use one to your advantage, and then go through 5 of the best Roth IRA accounts available now.

https://www.youtube.com/watch?v=Lm2IF6tRXl8

So what is a Roth IRA?

A Roth IRA is basically an individual retirement account that can give you tax-free investment growth and withdrawals.
Once you have reached the age of 59½ years old and have held an account for at least 5 years, you can take distributions and any earnings from your Roth IRA without paying any federal taxes.

It is available to people with a (MAGI) modified adjusted gross income of under $140,000 as a single filer or $208,000 if you are a married couple.

You also must have made a taxable income during the year that you contribute to your Roth IRA.
If you fall into the income category above, For 2021 you are allowed to contribute a maximum of $6,000 if you are under the age of 50, and if you are over 50 you can contribute $7,000.
And these funds can be deposited into your Roth IRA account over the course of the year as long as you don’t exceed the maximum amount for your age group.

And if you do happen to make more money than this there are ways to get around this by using a backdoor IRA, and I cover that in this video here.
Now these income and contribution requirements for the Roth IRA can change on a yearly basis so its good to keep updated with what they are each tax year

Who Can Benefit from a Roth IRA?

Generally speaking, younger people who have a lower income are most likely to benefit from having a Roth IRA due to the income restrictions it imposes.
Also, people who expect to earn a higher wage in the future and be in a higher tax bracket when they retire will also find it useful, as they can take advantage of compounding interest over the years and not pay any income tax when they start to take withdrawals from their Roth IRA account.

Now when it comes to opening a Roth IRA account you have a few options.
You can either use a bank, a brokerage like TD Ameritrade which is where I have my Roth IRA Account or a Robo-Advisor which is an automated investment strategy.

And once your money is in the account you can invest it in ETFs, Stocks, Bonds, Mutual funds, or even bank saving products.

Things to Know About a Roth IRA account

One thing that is worth noting is that you are able to withdraw any of your original contributions at any time with no penalty or taxes.
This is because any money that is put into a Roth IRA account has already been taxed.

If you are under the age of 59½ you may be subject to some taxes on any withdrawal of investment earnings from within your Roth IRA account.

You may also be subject to an early-distribution penalty of 10%
However, once you are over 59½ years old and have held a Roth IRA account for a least 5 years you will be able to take out any investment earnings from the account without paying any federal taxes.

So what are the benefits of a Roth IRA?

No age limit.

The great thing with a Roth IRA account is that you can open an account at any age as long as you have earned an income.

Access your money whenever you need.

So as I mentioned before, you can easily withdraw any money that you have previously contributed without being penalized, as long as it is just the money you actually contributed
If you withdraw any investment earnings you may well be taxed and receive an early-distribution penalty of 10%

No Minimum distributions

Unlike a 401k or traditional IRA account where you are required to make a minimum withdrawal each year after the age of 72.
A Roth IRA has no distribution requirements at all during the lifetime of the account holder.

Tax Free distributions

After the age of 59½ and having held an account for at least 5 years, you will be able to take distributions that include any earning without paying any federal taxes.

What are the Downsides?

Depending on your age and how long you have held your Roth IRA account can affect if you will be penalized.

If you meet the 5-year rule which is basically having a Roth IRA account for at least 5 years) the following rules apply:

If you are under 59½ any withdrawals of additional earnings will be subject to taxes and a possible 10% penalty.
Now you may be able to avoid these taxes and penalties in certain situations.
First of all, you can use the money for a first-time home purchase with a lifetime maximum of $10,000 withdrawal from the Roth Account.
Or if you have a permanent disability, or if you die and your beneficiary wants to take the distributions.

And If you are over 59½ years of age and meet the 5-year rule you will not incur any taxes or penalties for withdrawals on earnings.

Now if you don’t meet the 5-year rule the following rules apply:

If you happen to be under 59½ years of age you will be subject to the taxes and the 10% penalty for withdrawals on earnings.
Now you may be able to avoid the 10% penalty but not the taxes in the following instances:
You use the money for a first home purchase (and this is limited to $10,000 for the lifetime of your Roth IRA account).
Any qualified educational expenses, if you have a Permanente disability, any unreimbursed medical expenses, or if you pass away and your beneficiary takes the distributions.

And if you are over 59½ and don’t meet the 5-year rule withdrawals on your earnings will be subject to taxes but you will not receive the 10% penalty.

5 of the best Roth IRA accounts for 2021

Below I’ve listed 5 of the best Roth IRA accounts that are available now.
And just note that It is super easy to open an account with any of them and it usually only takes 10-15 minutes to do so.

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