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Roth IRA For Beginners 2023: A Complete Guide

A Roth IRA is one of the most powerful investment tools you have access to. It can potentially allow you to earn hundreds of thousands if not millions of dollars tax-free.

It is important, however, for beginners to understand how the Roth IRA works.

In this Roth IRA beginners guide, we will be teaching you everything you need to know about investing through a Roth IRA retirement account.

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In addition, Robinhood offers a free stock for new users as well as a 1% IRA match for retirement accounts.

What is a Roth IRA?

A Roth IRA is a type of retirement account that allows your money to grow tax-free.

Most people are familiar with 401(k) accounts through their employer, but not so much with IRA accounts (individual retirement accounts).

Both of these accounts are unique, and in many cases, it makes sense to have both a pre-tax retirement account and a post-tax retirement account.

Unlike the traditional IRA or 401(k), the Roth IRA is funded with post-tax income.

As a result, your money then grows 100% tax-free - so long as you follow the requirements.

Those who maximize their Roth IRA contributions at an early age potentially have the opportunity to become a tax-free millionaire by the time they reach retirement age.

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Roth IRAs For Beginner Investors

The best way to understand how a Roth IRA works is to look at the concepts of instant gratification versus delayed gratification.

401(k) = Instant Gratification

Investing through your 401(k) gives you instant gratification in the form of a tax write-off.

You contribute to a traditional retirement account with pre-tax income, meaning the contributions reduce your taxable income.

Down the road, you will have to pay taxes when you draw from the traditional IRA or 401(k).

Roth IRA = Delayed Gratification

The Roth IRA, on the other hand, is delayed gratification.

You are investing money you have already paid taxes on. As a result, there is no immediate benefit.

However, once you draw from the Roth IRA (assuming you follow the rules outlined later), you do so tax-free and penalty-free.

On top of that, you can withdraw your contributions from a Roth IRA at any time penalty-free and tax-free. You just can't touch the earnings.

Where To Open A Roth IRA?

Robinhood offers both Roth and Traditional IRA accounts. Customers can do both if they want to.

Robinhood IRAs support the full range of recognized contribution types including both deductible and non-deductible traditional IRA contributions, Roth contributions, and rollovers.

All of the stocks and exchange-traded funds (ETFs) available in a regular Robinhood account are also available in a Robinhood IRA.

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This innovative feature is an extra 1% that Robinhood kicks in for making eligible contributions.

Let's explore how the Robinhood IRA Match works and how you can take advantage of this valuable feature.

For 2023, the limits have increased to $6,500 and $7,500 respectively, allowing you to earn up to an extra $65 or $75.

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Who Is Eligible For A Roth IRA?

If you make less than $138,000 as a single filer or $218,000 as married filing jointly, you can fully contribute to a Roth IRA.

For those making more than $153,000 as a single filer or $228,000 as married filing jointly you cannot directly contribute to a Roth IRA.

If you fall in between these figures, you can make a partial contribution that needs to be calculated based on your income.

2023 Roth IRA Contribution Limits

  • $6,500 for Under 50
  • $7,500 for 50+

When Can You Contribute?

You can contribute to a Roth IRA at any time from January 1st to April 15th of the following year. This gives you a 15-month window for when you can make your contributions.

Some people contribute each month throughout the year, following an investment strategy known as dollar-cost averaging.

Others will maximize their entire contribution right at the beginning of January, so they don't forget!

The Benefits Of A Roth IRA

There are several benefits associated with investing in a Roth IRA. While most are tax-related, not all are.

1. Tax-Free Retirement Income

The first benefit, which we already discussed, is the tax-free retirement income.

Anyone with earned income can begin contributing to a Roth IRA. If you don't have earned income but are married to someone who does, you may be able to take advantage of a spousal Roth IRA.

As long as you are within the income limitations, you can maximize your contribution year after year.

Once you reach the retirement age, which is currently 59-1/2 years old, you can begin withdrawing the earnings tax-free as long as your account has been open for at least 5 years.

If the 5-year clock has not been met yet, you must wait until then to withdraw your earnings if you want to avoid taxes and penalties.

Remember, you can withdraw contributions at any time and any age penalty free!

2. No Required Minimum Distributions

Retirement is for some people, but it isn't for everyone. Maybe you want to continue to work into your 60's or even your 70's.

If that is the case, you might want to continue contributing to your retirement savings as well. Or, you at least don't want to touch that money yet.

The Roth IRA has a huge benefit that the Traditional IRA does not have, and it comes down to required minimum distributions.

At age 72, the IRS requires you to start taking distributions from your Traditional IRA and begin paying taxes as well.

The Roth IRA is different! There are no required minimum distributions.

This means that you do not have to take money out at any time. It also means that you can continue contributing to the Roth IRA, so long as you have earned income.

3. High-Income Loophole

We will go into more detail about this later, but there is a loophole called a Backdoor Roth IRA that allows high-income earners who exceed the income limitations for a Roth IRA to contribute anyway.

For 2023, the income limits are $138,000 for single filers and $218,000 if you are married filing jointly.

If you make less, you can contribute to a Roth IRA directly. If you make more, keep reading, as we will explain the Backdoor Roth IRA later.

4. Access To Contributions

Since you are contributing your post-tax income, you can withdraw your contributions at any time tax and penalty-free.

When you invest, you have both contributions and earnings.

  • Contributions are the money that you are putting in.
  • Earnings are the money you earn as your investment grows.

5. Estate Planning

For those who are not familiar, estate planning is anticipating and laying out plans for when you pass away.

Your Roth IRA is passed right along to your heirs tax-free and penalty-free.

As long as they meet the required criteria, the Roth IRA continues to grow tax-free.

6. Freedom

The next benefit of the Roth IRA is that you have complete freedom over where you open one and what you put in it.

With the 401(k), you are stuck with whoever your employer works with, and whatever that plan offers. In some cases, this could be high fee mutual funds that are just not an appealing investment.

You can open a fee-free Roth IRA with Robinhood and pick and choose whatever stocks or ETFs you want to invest in.

7. Home Purchase

You are allowed to withdraw earnings from your Roth IRA if you are under the age of 59-1/2 as long as that money is going towards your first time home purchase.

If this is the case, you will not pay any taxes or penalties on the withdrawal from your Roth IRA.

The maximum amount of earnings you can withdraw is $10,000.

This makes the Roth IRA a great place for investing money earmarked for a first time home purchase.

Backdoor Roth IRA Explained

A backdoor Roth IRA is how you can get around the income limitations that are in place for contributing to a Roth IRA.

As we mentioned earlier, you can't directly contribute to a Roth IRA if your income exceeds the current annual limit.

  1. Instead of contributing directly to a Roth IRA, you contribute to a Traditional IRA.
  2. Then, you convert that Traditional IRA into a Roth IRA.

Based on current laws, which could change eventually, anyone can convert a Traditional IRA to a Roth IRA regardless of their income.

What Is A Roth IRA Conversion?

Another option you have for funding a Roth IRA is doing a rollover.

If you have an old 401(k) that you want to use to fund a Roth IRA, you can do precisely that. One caveat is you need to make a pit stop in between at the Traditional IRA.

Typically, it goes something like this. You roll over your 401(k) to a Traditional IRA, this transfer is not a taxable event.

Then you convert the Traditional IRA to a Roth IRA and pay the tax bill.

Robinhood offers an IRA rollover service for those interested.

Roth IRA For Beginners: The Verdict

As Benjamin Franklin wisely wrote hundreds of years ago "in this world, nothing can be said to be certain, except death and taxes."

Fortunately, taking advantage of a Roth IRA can allow you to postpone or even entirely eliminate one of these in much of your life.

It's rare to find an opportunity where Uncle Sam is clearly letting everyday individuals accumulate wealth without collecting taxes, so for many, funding a Roth IRA is a no-brainer.

Don't forget to grab your free stock worth up to $200 from Robinhood today!

Article written by J. Thomas
JT graduated with a degree in Personal Finance from a Big Ten university. Since then he has worked as a Financial Planner with a nationally recognized RIA. In his free time, he enjoys playing basketball, spending time outdoors, and traveling abroad.

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