Ask Annie: Common Questions about Roth IRAs
When you have the gall to combine a random senator’s last name with an acronym, you can expect that people are going to have questions. So today I’ve rounded up some common questions I see regarding Roth IRAs. Who should have one? Do you qualify? Is it worthwhile to have if you can’t contribute the full amount? If you have questions, read on!
(If you don’t know what I’m talking about, a Roth IRA is a special type of Individual Retirement Account (IRA) named after the late Delaware Senator William Roth in the 90s. The primary benefits of a Roth IRA are that you don’t pay taxes on it when you take money out when you’re retired and you aren’t required to take money out of it at all.)
Note: I am not an investment advisor. This is for informational purposes only. For actual advice on your situation and investments, please consult an investment advisor or financial planner.
Is it worthwhile to open a Roth IRA even if I know I can’t afford to max it out every year?
YES! Absolutely! Any amount you can contribute is worth it. First, you might be surprised at how much you can build up over time. Second, building up the right financial habits is critical to any savings goal. You just have to start somewhere and keep doing it. Once you’ve established the habit, you can work toward gradually increasing the amount. For now, just start with anything and celebrate that as a great first step!
Read more: How to Know if You’re Saving Enough for Retirement
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What does it mean to max out your retirement account?
Maxing out means that you contribute the most you are allowed to contribute. For 2021, that amount for IRAs and Roth IRAs is $6000, or $7000 for those age 50 and older. Other retirement plans, such as 401ks and plans for the self employed, have limits that are higher. Just check the current year's contribution limits to find out what they are.
Where should I open a Roth IRA?
Vanguard, Schwab, and Fidelity are considered to be the big three companies for retirement savings, but they are by no means the only great options. Look for companies with low fees and good service. I will tell you right now that your bank probably isn’t going to make the cut.
I personally use Schwab and like their easy-to-use website and selection of low-cost index funds. (And no, they’re not paying me to say that.)
I’m a stay-at-home mom with a part-time photography business. My income will probably be around $2000 this year. Do I even qualify to open an IRA or Roth IRA?
In order to qualify for a Roth IRA, you have to have earned income that doesn’t exceed the income limits. This includes taxable wages from employment or self-employment (including farm income, contract work, etc). It does not include child support, alimony, social security, or money earned from investments.
Any income you make from your photography business would count.
If you are married and your spouse earns income, you can also do what is called a spousal IRA. This just means you can make your contribution based on your spouse’s income. You don’t need a separate account or anything. Just make sure that the total amount of earned income between you and your spouse is more than the amount you contribute to your IRA or Roth IRA.
Read more: It’s Not Too Late to Start Saving for Retirement: Here's How to Get Started
Do you have to be actively working to get a Roth IRA? I'm getting ready to move to another state and will probably be jobless for a few months until I find something. Would this affect it?
It depends. You have to make the contribution from earned income. So if you've earned over $6000 this year from your job, you can contribute the max to a Roth. You don't have to be working at the time as long as the earned income is from this calendar year. If you are married, a spouse’s income counts too.
What’s the benefit of a Roth IRA vs a HYSA or 401k plan?
A 401k is only available through work. They often have higher investment fees, but they're convenient and often come with an employer match. If you have access to one, get a match, and only have so much money to invest, start with your 401k.
A Roth IRA is available to anyone with earned income (from a job, not from investments). Roths are great because you make contributions from money that has already been taxed. With a regular IRA or a 401k, you have to pay taxes on the money taken out in retirement. With a Roth you don't. I personally think everyone should have a Roth because the tax benefits are so great.
An HYSA (high yield savings account) is just a savings account that earns slightly more interest than a regular savings account. HYSAs are great places for money you're saving for an emergency fund or other short-term goals. Money you're saving for retirement should go in a retirement account (IRA, Roth IRA, 401k, etc).
Should I open a Roth IRA if I'm maxing out my 401k every year? My student loans are my current primary concern after obtaining my employer's maximum 401k match (which I feel I'm contributing a lot of money towards). I'm not sure if opening a Roth IRA makes sense to me because I don't have as much leeway on my income after prioritizing my loans and my 401k.
This is a great question and the answer depends on how much money you have available, what your goals are, and how you feel about it. First, you’ll want to make sure you’re saving enough for retirement. Since it sounds like you are, paying extra toward your student loans might make sense just for the peace of mind.
Others would argue that you should prioritize investing if the potential return would be higher than the student loan interest. This is also a valid argument.
Ultimately, since you are already saving quite a bit for retirement, the choice is yours. You have to make this decision based on what feels right for you. And remember, doing both is also an option.
I’m having trouble picking between a Roth IRA and a Traditional IRA. I am anxious by nature and want to make sure I pick the right one. I do understand the differences between the two retirement accounts, but I really just need any final pointers or words of advice to help me choose the right one.
Here’s the thing: the most important thing is that you are saving for retirement at all. You’re already doing well simply because you know you need to save and you are taking action to make it happen.
It’s so easy to get caught up in the details of which account to use or where to open an account, when the one thing that will have the biggest effect on your retirement is simply putting money in an account somewhere.
The thing is, none of us knows what the future will hold with any certainty. Taxes could be higher or lower. The market could go up or down. Our income might be higher or lower. We simply don’t know.
So all we can do is focus on what we can control (saving money), make some educated guesses about the future, and adapt our plan over time.
The usual advice is to choose a traditional IRA if you expect to have a lower income in retirement than you do now, but unless you’re close to retirement, it’s nearly impossible to know that.
If you’re younger and eligible, a Roth IRA is almost never a bad option. At worst, you may have paid slightly more in taxes and end up with tax-free retirement withdrawals and increased flexibility in retirement. That’s not a bad place to be. For that reason, I really love Roth IRAs.
Make the best decision you can and remember that you can always change strategies in the future. Focus on saving as much as you can and call it a win.
The worst thing you can do is let indecision keep you from doing anything at all.
More questions?
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