The Roth IRA Basics and What You Need to Know to Get Started Today!

Roth IRA BasicsAllow me to be your Dad for a minute and tell you that if you haven’t setup a Roth IRA yet, then what are you doing?!

Seriously, if you’re trying to figure out what to do differently with your money this year, how about putting in something that will grow tax free! Whether you know much about investing or money, read on as I explain all the essential Roth IRA basics and what you need to know to make the most of them.


The Essential Roth IRA Basics:


How Much You Can Contribute:

To start out, an IRA (Individual Retirement Arrangement) is a special type of U.S. investment account that is intended to help you save for retirement by giving you a break on your taxes. Unlike a 401k, you setup this account yourself outside of your employer.

Although there are several types of IRA’s, the two most common ones that people invest in are Traditional and Roth IRA’s. The main difference is as follows:

Roth IRA Basics


Higher Earnings Potential with the Roth IRA:

Although they sound similar on the surface, one of the basics of a Roth IRA that people don’t realize is that you can actually potentially earn more with the Roth option. This is because of the way that the taxes work. It leads to what’s called a higher effective contribution rate. To see a detailed example of how this works, read my previous post Traditional vs. Roth IRA – Part 3: Why I Prefer a Roth IRA.


How Much Can I Invest?

No matter which IRA you choose, the maximum allowable contribution (as of 2013) is $5,500.  Therefore, a couple can setup two for a maximum of $11,000.


What Can I Invest In?

Your Roth IRA can be any number of investments from safe to risky:

• CD’s

• Bonds

• Mutual funds

• ETF’s

• Stocks

• Annuities

• Real estate

Usually whenever you open any of these accounts, you can request that they be designated as a Roth IRA.

For help on getting started, read my previous posts:

How to Buy an Index Fund

My Picks for Vanguard Mutual Funds for Our Roth IRA


Are There Any Requirements for Contributing?

In addition to simply needing to have earned income, one of the big Roth IRA fundamentals is that your ability to contribute may be limited depending on how much money you make. It all depends on your Modified Adjusted Gross Income (MAGI) reported on your tax documents.

Here are the Roth IRA income limits:

Roth IRA Basics


Other Things to Know About Roth IRA’s: 

• If you absolutely need your money back, you can take an early withdraw from Roth IRA contributions (the money you put in, not the earnings) after 5 years under certain conditions.

• You can’t convert a Roth IRA to a Traditional IRA. But you can convert a Traditional IRA to a Roth.

• You don’t have to take required minimum distributions at age 70-1/2 like you do with a Traditional IRA, 401k, and other retirement accounts.

• If you die, you can will a Roth IRA to an heir without tax implications or penalty.


Readers – What are some of the characteristics about Roth IRA’s that you find more attractive over other types of retirement accounts?


Related Posts:

1) Retirement Income Strategies for My Money Design – November 2012 Update

2) SCARY Retirement Statistics – Don’t Let Lack of Planning Haunt You!

3) Six Easy Steps for Figuring Out How to Save for Retirement

Image courtesy of igraur codrin /


    • MMD says

      The two of you have a plan and you’re sticking to it – I like it! Hopefully you can use some of this info later on when you finally do setup that Roth.

    • MMD says

      I do like the sound of never having to pay taxes again on that money; especially after its been allowed to grow tax free for +30 years!

  1. says

    What I love about a Roth IRA is that everything you earn is tax deductible, after 59.5.
    We currently have a Roth 401(k) and Roth IRA. My wife’s company match is placed into a regular 401(k). Our goal is to pull from the regular 401(k) until we reach the point where we would owe taxes. Then take the rest from the tax free accounts. This way we stretch our money and reduce our tax burden.
    Justin@TheFrugalPath recently posted..In Debt and Out of Ideas? Draw Your Purchases.My Profile

  2. says

    I personally use my Roth as an investment tool for my more risky investments (currency, individual stocks). The hope is that if these end up outperforming benchmark indexes I will be able to max out the advantage of that tax benefit.

    • MMD says

      Using your Roth as a playground for investments? That’s something I don’t hear very many people say. Very interesting strategy! I’ll have to read up on one of your posts and see how its working out for you.

  3. says

    For most people entering retirement a Roth IRA is unnecessary. The tax deduction in your income earning years is likely to be more beneficial than the tax free distributions during retirement. Even if you’re a rich old geezer, you likely have various tax shelters, off shore shell companies, charitable contributions, trusts, etc. For almost every retiree, their income from distributions will still be under their personal exemptions and itemized deductions.
    Chris @ recently posted..How Much Does It Cost To Start Up A Small Business?My Profile

    • MMD says

      Even if they were the same, I’d rather take them in my retirement years. There seems to be more of a psychological benefit. Knowing that my money is my money and not having to allocate a portion for tax payments is worth it to me.

  4. rpw says

    Like Lacy @EarnVerse I also use my Roth IRA as a Trading “playground” for both speculative stocks and dividend stocks. Lately I’ve been trading in/out of UVXY.

    Does anyone know if you are required to account for stock trades (in other words — keep records of my trades, gains/losses, etc) within a Roth IRA since they are tax free? Also – do “wash” rules apply?
    I would think not but alot of things in this world don’t make sense so I could be wrong.
    I thought this was a great way to get around the craziness of record keeping for stock trades.


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