College students across the country are starting a new semester, and for many it can be an intimidating and new experience. As an adjunct professor, during this time I am normally focusing on getting them through “Intro to [Insert Class Here]”, but I realized that they are not the only people who are intimidated by the numbers and information that get thrown at them!
Every day, adults are given financial advice that leaves their heads spinning. With this in mind, I want to demystify some basic retirement and investment vehicles. I want to build a strong foundation for those who need to begin with the ABC’s of investing and retirement planning before they turn into Suze Orman (I really must meet this woman).
I’ll begin with one of my favorite ways to start saving for your retirement, the ROTH IRA!
Roth Individual Retirement Account (IRA)
Senator William Roth of Delaware was a huge advocate for IRA reform, and in 1997, as part of the Taxpayer Relief Act, the Roth IRA was created.
With a Roth IRA, you contribute money for which you have already paid taxes. You do not get an upfront tax break like you might with other types of investments, but there is a silver lining: when you start to withdraw funds from the retirement account, including the money you deposited and the money you earned on those contributions, you will not be taxed! Hooray!
Why am I shouting with joy about this? You cannot predict what the tax rate will be when you retire. But with the way these things work, it’s a safe bet that the rate will be higher at your time of retirement than it is now – so pay the taxes now and thank yourself later.
Withdrawals: Something to Consider
You can withdraw money prior to your retirement from a Roth IRA without taxes or penalties. However, if you withdraw money beyond your original contribution, this is considered “earnings,” and you will pay taxes and penalties on that amount.
Warning: I do not recommend using funds from your Roth IRA to pay for any outstanding debt. This is meant for your retirement and shouldn’t be used in any other fashion.
Who Can Qualify for a Roth IRA?
The IRS has very distinct rules as to who can qualify for a Roth IRA.
- Check how you file your taxes and income to see if you qualify. If you are married filing jointly, you can qualify for a Roth IRA if you and your spouse earn up to $181,000. If you file your tax return as single, you can earn up to $110,000 and qualify for a Roth IRA.
- The IRS says that you must have “earned income.” Earned income includes salary, wages, tips, self-employment income, bonuses, commission, and military differential pay.
- Additionally, the IRS is interested in your “MAGI.” What is a MAGI? MAGI is an acronym for Modified Adjusted Gross Income. This amount can be found on your tax return.
How Much Can You Contribute To A Roth IRA?
If you are under the age of 50 you can contribute $5,500 per year. Those over 50 years of age can contribute $6,500 per year.
A Roth IRA is a wonderful plan for retirement savings. It is easy to understand, and you will not be taxed when you begin to receive distributions.
This type of retirement account can be opened through banks, financial advisors, or my personal favorite: a discount brokerage firm such as TD Ameritrade.
Whatever choice you make when it comes to your retirement, I hope that it is an informed choice. Please understand where your money is going and how it is going to work for you over the course of your life.
Next month, I will be discussing Traditional IRA’s. Smart is our sexy!
Amanda Golsch is a six year employee of Children’s Hospital Medical Center and an adjunct professor for the University of Cincinnati. While in grad school, Amanda developed a passion for personal finance. She realized that personal finance can impact every aspect of your life, including your health. Therefore, Amanda has set out to teach as many women as possible basic financial principles that can leave a powerful and lasting impact. Her motto is “A financially literate woman is a powerful woman.” Got a question for Amanda? Write to firstname.lastname@example.org.