I’m excited to be taking part in The Roth IRA movement organized by Jeff at Good Financial Cents. Essentially, Jeff has encouraged his fellow bloggers to dedicate an entire day to the Roth IRA and I couldn’t be happier to share some information about what I consider to be a key ingredient in retirement planning. 
 
It’s undeniable that Whitney Houston was an amazing vocalist. It’s also undeniable that a Roth IRA is an amazing, must-have investment. By following a few simple rules, you can build a financial legacy that rivals the musical legacy Houston left behind in the wake of her untimely passing. With a few adaptations, Houston’s songs can teach you everything you need to know about a Roth IRA…

Greatest Investment of All (originally Greatest Love of All)
The beauty of the Roth IRA is that it’s the best investment vehicle you can utilize to build a solid financial future in terms of tax-advantaged retirement savings. Perks of the Roth IRA include:

• The account grows tax-free because it’s funded with after-tax income
• Your post-retirement age (59.5+ years old) distributions are free from federal income taxes
• You can invest in a 401K, 403b, etc. AND a Roth IRA
• You always have access to your contributions
  • You can withdraw any of your contributions (not the gains) at any time without penalty
• If your account has been open & funded for more than 5 years, you can withdraw up to $10K of your gains to put towards the purchase of your first home (you can still withdraw your contributions on top of this)

 

Saving All My Money for You (originally Saving all My Love for You)
Here are some tips for making a Roth IRA work for you:

• Open your account as early as possible
  • A person who opens a Roth at age 25 and maxes it out every year until 65 will save approximately $1.4 million (assuming the historical 8% rate of return prevails)
• Automate your monthly investments
• Establish (and maintain) an emergency fund outside of the Roth–don’t take $$ out of your Roth IRA until retirement if at all possible.

 

I Will Always Fund You (originally I Will Always Love You)
As with all of the “gifts” bestowed upon us by the government, the Roth IRA does come with a few strings attached. They include:

•  Contribution caps
  • If you’re younger than 50, you can contribute up to $5K/year
  • If you’re 50 or older, you can contribute up to $6K/year
• Income caps
  • Singles cannot contribute to a Roth IRA at all if they make over $125K/year.
  • Singles cannot contribute the full $5K if they make over $110K/year (contribution limits are “phased” according to a few algorithms)
  • Married couples cannot contribute if their combined income is over $183K/year and phased out contributions kick in if their income is $173K
• Distribution caps
  • Your account must be opened and funded for five years before you can begin to withdraw gains regardless of your age (remember, you can always withdraw your contributions)
    • If you open a Roth IRA when you’re 80, you can’t withdraw any gains two years later unless you’re willing to pay a 10% penalty

 

I Wanna Invest with Somebody (originally I Wanna Dance with Somebody)
Roth investment options are virtually endless (you can invest in stocks, bonds, real estate, etc.). Here are some ways to open your account today:

• Use your tax return as an initial investment
• Some companies only require investments as little as $50/month if you sign up for auto-debit
• Stick to no-load funds with low expense ratios if you’ll be investing in mutual funds
• Some of the more popular companies are T. Rowe Price, TIAA Cref, and TradeKing (external links)