Roth IRA Explained Simply for Beginners

I just want to tell you this from the start, because you know I'm just going to be very direct and straight up with you. The Roth IRA is considered one of the best retirement accounts out there, and I think it's very important that you know about this. So welcome to your Roth IRA Explained for Beginners video. Okay, as I said, the Roth IRA is considered one of the best retirement accounts, and here's why. You put money into a Roth IRA account. It grows tax-free. When you take that money out, it's also tax-free. It's 100% tax-free. There's zero taxes with the Roth IRAs. That's the biggest advantage. And I just want to say that it is so advantageous that the IRS limits how much that you can put into the Roth IRA each year. I mean, of course, there's limitations with other retirement plans as well, but how much you can put into a Roth IRA is so much less compared to a 401k, a 403b, or a 457b. Listen, if you're a subscriber, then you know that I'm going to be honest with you. If the Roth IRA sucks, I would tell you that it sucks, but it doesn't. In my opinion, it's pretty awesome. And I just want you to know that I'm not trying to sell you anything. If you open up a Roth IRA account, I get no commission. I don't get any benefit out of it. I'm just saying for your own good that you really need to look into getting a Roth IRA. It's very easy to open up an account online at whatever financial institution that you want. So here's what you need to know. I will explain in today's video what is a Roth IRA, why is it considered the best, what are the bad things about a Roth IRA, and how do you get a Roth IRA. So I'm going to keep this very simple for you. Okay, so let's start with this one. What is a Roth IRA? A Roth IRA is a retirement account, and the concept, as you know, it's very simple. It's straightforward. You put money in your accounts, you invest that money, it grows, and then you take that money out at retirement. But here's what you need to understand. So you know with a 401k, or a 403b, or a 457b, those are retirement plans that you sign up for at your workplace. It's through your employer. A Roth IRA has nothing to do with your employer or your workplace. A Roth IRA is a retirement plan that you set up on your own, outside of your workplace. But it's very easy to do that. For example, you can set up your Roth IRA account online at Fidelity, or Vanguard, Schwab, so many financial institutions where you can do this. It's very easy to open up an account. It's similar to opening up an online savings account. It's not difficult. Okay, so once you open up your Roth IRA account, then what do you do next? And the answer is very simple. You transfer money over to your Roth IRA account. So the most common way to do this is from your bank account. Transfer from your bank to your Roth IRA. Okay, so you can transfer money to your Roth IRA accounts little by little, throughout the course of the year, or you can do a big lump sum. It's whatever you want. Okay, so once you do this, then you're going to have money just sitting in your Roth IRA accounts, and then you're going to have to invest it. So what should you invest in within the Roth IRA? I would recommend that you keep it simple. Diversify your money, get some stock index funds, bond index funds, and some international index funds. Now, I want to give you this very important clarification. If you have a 401k, or a 403b, or a 457b at your work, you can also have a Roth IRA outside of your workplace. And you can put money into both your Roth IRA and your 401k, or your 403b, or your 457b. Okay, now why is the Roth IRA considered the best retirement accounts out there? I would say that the number one reason why it's considered the best is because it's 100% tax free. Additionally, the Roth IRA has other advantages. So I'm going to tell you three of them very briefly. Number one, minimal fees. This one is definitely a top three. The Roth IRA is known for having smaller fees compared to other retirement accounts. And this is so important because if there's less fees, that means more money for you. Reason number two is more investment options. The Roth IRA is going to offer more investment options compared to other retirement accounts. So basically, this is going to give you flexibility. Reason number three, no required minimum distribution. So no RMDs. You will not be forced to withdraw money from your Roth IRA regardless of your age. Okay, now I told you why the Roth IRA is awesome, but what's the catch? Because it can't just be all rainbows and sunshine, right? And again, I'm going to be honest with you, and I'm not going to be one-sided or blind about this. The Roth IRA is not perfect. There are drawbacks, but I believe that the pros outweigh the cons. Nevertheless, here are the negative aspects of the Roth IRA. I'm going to give you two of them. So number one is that there is no tax deduction. You know how all the money that you make in a Roth IRA is tax free, right? I'll tell you why. When you put money into a Roth IRA, you do not receive a tax deduction, which is bad, but you don't pay taxes when you take the money out. Compare that to a 401k. With a 401k, you get a tax deduction when you put money in, but you pay taxes when you take that money out. However, with that being said, I still like the Roth IRA better because here's my thinking. Let me know if you agree or disagree. So let's say that you put $10,000 into a 401k. Then you would get a $10,000 tax deduction right now. And then over the next 30 years, let's just say that it grows to $100,000 in total. When you take that money out at retirement, then you will have $100,000 of taxable income. So it's nice that you got that $10,000 tax deduction when you put money into the 401k, but you're going to get taxed on that $100,000 when you take it out at retirement. Now let's demonstrate the same scenario with the Roth IRA. You put $10,000 into your Roth IRA and it grows to $100,000 over the next 30 years. You do not receive a tax deduction for putting money into your Roth IRA, but the full $100,000 will be tax-free when you take it out at retirement. So ultimately, it's a choice. It's a choice between get a tax deduction now and pay taxes later, or no tax deduction now and tax-free later. Now here's the second drawback. There's an income limitation. If you make too much money, then you are disqualified from putting money directly into your Roth IRA. This amount gets adjusted for inflation each year. In 2024, if you're single, it's $161,000. Married, it's $240,000 combined. If you make more than those amounts, then you cannot put money directly into a Roth IRA. But there are loopholes. If you make more money than that, then I would say don't worry. There's a common trick that people use. It's called the backdoor Roth IRA. So essentially and ultimately, you can still use a Roth IRA. But that's for a separate video, but I just want you to be aware of this. Now I'm going to end with these closing remarks, and this is so important. You need to hear this. You can have a 401k and a Roth IRA. I get asked all the time, which one should you put money into first? People ask this, and this is a good question, if you don't have enough money to maximize both accounts each year. So here's my quick answer. If your employer is offering you a 401k match, then do that first. So for example, let's say that your employer offers you a 50% match on your 401k. That means that if you put $100 into your 401k, then your employer will throw in an extra $50 into your 401k. So it's like free money, and I would prioritize that opportunity first. However, your employer will stop matching after a certain amount. It just depends on your employer. Once you hit that maximum matching amounts, or if your employer doesn't offer you a match, then honestly, I would rather put money into a Roth IRA, but that's just me. And listen, if you want a more detailed analysis comparing the Roth IRA versus the 401k, please check out my other videos. I'm going to leave a link for you down below. Also, if you want to learn more about the Roth IRA, please check out my website. The info is free. No signup necessary. I just want to help you out. Thank you so much. Please subscribe, and I wish you a very nice day. Take care.