One of experts' favorite retirement accounts gives you 2 clear benefits your workplace plan doesn't
- Investing in a Roth IRA, a popular type of retirement account funded with after-tax dollars, is a smart way to get started investing and save for the future.
- Roth IRAs have two advantages over a typical workplace retirement plan: You get to pick your own investments from a much larger pool of options and your earnings grow tax free.
- You can contribute up to $6,000 to a Roth IRA in 2019 if you're single and earn less than $137,000, or married and earn less than $203,000.
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One of the easiest ways to start investing is through a retirement account.
If your company offers a 401(k) or other defined contribution plan, that's great - but it doesn't have to be your only vehicle for saving. As certified financial planner Lauren Lyons Cole wrote for Business Insider, "It's not 'either or' ... It's 'both and'."While the contributions you make to a workplace retirement plan are likely tax-deferred, lowering your taxable income today, the investment choices are often slim and fees can be high.
Still, if your company offers a match - usually a percentage of your salary up to a specific dollar amount - it's worth contributing, says financial expert Ramit Sethi in the latest edition of his best-selling book "I Will Teach You To Be Rich."
After earning the company match, Sethi recommends turning your attention elsewhere: the Roth IRA. Roth IRAs have two advantages over a typical workplace retirement plan, which are that you get to pick your own investments and your earnings grow tax-free.
How to invest in a Roth IRA
Roth IRAs are a popular type of individual retirement account funded with after-tax dollars. Because they're operated through brokerages, Roth IRAs offer a ton of investment options, including a wide variety of stocks, bonds, mutual funds (including index funds), exchange-traded funds (ETFs), and certificates of deposit (CDs).
With a Roth IRA, your portfolio is in your hands. You'll be able to decide exactly which investments you want and compare the fees associated with those funds. You may also have the option to trade directly. Some firms, including Charles Schwab and Fidelity, offer Roth IRAs with no annual maintenance fees or minimum deposits to open.
Are you on track for retirement? Find out with this calculator from our partners:When you're choosing where to invest your money in a Roth IRA, Vanguard recommends considering your risk level, how many years you have until retirement, and how you can diversify from the investments you already have in a workplace plan. Experts often suggest target-date retirement funds for younger workers, which invest more aggressively the further you are from retirement and gradually gets more conservative.
Contributions and earnings grow tax-free in a Roth IRA
The real beauty of Roth IRAs is tax-free growth. Years of contributions and investment earnings compound and once you reach age 59 and a half, you can begin withdrawing your money tax free as long as you've had the account for at least five years.
You can actually withdraw your contributions at any time, tax and penalty free, since you already paid taxes on the money before funding your account. With a traditional IRA and most workplace retirement plans, your withdrawals are taxed as income, which can eat into your returns.
In 2019, you can contribute up to $6,000 to a Roth IRA if you're single and earn less than $137,000, or married and earn less than $203,000 (there's also a $1,000 catch-up contribution for people over 50). Earners above those limits aren't out of luck, though.
The backdoor Roth IRA strategy enables high earners to take advantage of tax-free investment growth by contributing to a traditional IRA first, and then rolling it over into a Roth IRA (you'll pay income taxes now rather than on the backend). Traditional IRAs don't have income limits, per se, but the amount you can contribute tax-deferred depends on filing status and whether you contribute to a workplace plan.