I frequently get contacted by FitBUX members stating a family member or friend told them to open a Roth IRA. However, they often have no idea what it is but its an investment term all investment beginners should know.
Therefore, I wrote this Roth IRA guide that answers the top nine questions we receive about them from FitBUX Members using our investment technology.
What Is A Roth IRA Account?
A Roth IRA is an individual retirement account. The money you put into is contributed after taxes, which means that you don’t get a tax deduction or tax credit in the year you contribute money to a Roth IRA account.
Then, while the account grows, you don’t pay taxes which means it is tax deferred. Once you reach 59.5 years old, you can withdraw the gains tax-free.
How Does A Roth IRA Work?
The biggest misunderstanding we see is people think a Roth IRA is an investment. It’s not. It is simply a holding account with a special tax treatment. Once you deposit money in a Roth IRA, you then have to decide how to invest it.
Should You Have A 401(k) and a Roth IRA?
If you can afford both and are eligible for both, then yes! At a minimum, if your employer offers a 401(k) with a match, you should contribute the amount needed to get 100% of your employer’s match. In addition, we recommend contributing $50 a month to a Roth IRA. This will provide you with retirement income diversification as each account has different tax benefits and may allow you to invest in different securities and other financial products.
Once you put the minimum into both accounts, it largely depends on your income as to which one makes since to contribute to. The key is to making this decision is by setting up your financial plan wisely. Check out this financial planning example to see how to do this.
Where To Open A Roth IRA?
There are 4 primary places to open a Roth IRA: RIAs, Robo Advisors, Do-It-Yourself, and a hybrid of the above.
1- RIAs are Registered Investment Advisors. RIAs typically charge you 1% – 2% of the assets you have invested with them and in my opinion don’t provide you the value you think you’re getting from those fees.
2- Robo Advisors are cheaper, typically .25% – .50%. Unfortunately, they only look at a subset of your financial picture which may leads to incorrect decisions.
3- Because of the costs of RIAs and the silo’ed approach of robo advisors, many end up taking matter into their own hands. This may be the cheapest way to invest in a ROTH IRA. However, it may also be the most time intensive.
4- Addressing this gap in the market, the FitBUX hybrid approach combines the benefits of all these approaches:
a) Our AI-powered financial planning platform makes it easy to analyze your complete financial profile which includes your human capital and debt, in addition to your financial assets.
b) Our investment technology calculates the level of risk you will be able to bear based on your current and projected holistic situation. We make this easy to track and follow with our proprietary score, the FitBUX Score.
Armed with this information, you get to decide whether you want us to design a dynamic portfolio that will adjust based on the level of risk you can bear over time as indicated by the variations in your FitBUX Score or whether you would rather adjust your own portfolio manually to take on more/less risk.
Once you’ve decided how to proceed, we will utilize our partner’s technology (Betterment) to invest efficiently.
Our approach is flexible and efficient, giving you full control of the process and leveraging our underlying AI to optimize both risk and returns in a dynamic fashion. In addition, if you have questions you can always schedule a call with a FitBUX Coach at no additional cost!
How Much Should I Put In My Roth IRA?
As mentioned above, we recommend contributing at least $50 per month and using a dollar cost averaging approach to do so. The ultimate amount you should put in depends on your financial situation and your goals. Obviously, putting the maximum of $6,000 per year would be the most beneficial.
Are Roth IRAs Safe?
Most are asking this question because they are afraid of losing money on their investments. As stated earlier, a Roth IRA is not an investment but simply is an account that houses investments. Therefore, the risk comes from the different positions in this account. This is why our approach is so critical in order to understand and take a risk-based approach.
What Are Roth IRA Interest Rates?
Here again, a Roth IRA is simply a structure, not an investment and as such, do not pay interest. However, the investments that you hold within your IRA may pay interest.
What Are Roth IRA Contribution Limits In 2022?
Contributions are $6,000 a year per person. If you are older than 50 you can contribute $7,000 per year.
What Is A Roth IRA Conversion?
A Roth IRA conversion is the process by which you move funds from a Traditional IRA, 401k, 403b, or other qualified employer plan to a Roth IRA.
Because you will. have to pay income taxes when you convert to a Roth IRA, you will want to try and make the conversion in years where you have a low(er) income and therefore pay taxes at a lower rate (or better yet, don’t have to pay taxes at all).
One of the key advantage of a conversion is that while you pay taxes “up front”, you will enjoy tax-free withdrawals in retirement.
Also, a form of conversion maybe called a backdoor Roth IRA. If your income is high or you are married filing separately you’ll want to check those out.
What Is A Rollover Roth IRA?
If you have a Roth 401k with your old employer, you can roll it over to a Roth IRA. This is considered a rollover Roth IRA. Also, you may rollover a traditional 401k to a Rollover Roth IRA as well. However, there are taxes implications. Learn more about 401k rollovers here.
By Joseph Reinke, CFA