Where should I open a Roth IRA

Routes to finance

Here's a common question investors ask every day. Which is better: a traditional IRA or a Roth IRA? While both have their advantages and disadvantages, each are fantastic ways to save for your golden years, but in almost all apple-to-apple comparisons, the Roth IRA will win. Quite frankly, a Roth IRA is the closest thing to perfect tax evasion that you will likely ever find. So much so that almost anyone who qualifies should definitely consider adding a Roth IRA to their investment toolbox.

Still, it's important that you understand the differences between the two accounts. For the next five to ten minutes, let's examine both the traditional IRA and the Roth IRA so you can get a better idea of ​​how each one fits into your overall portfolio.

Both a traditional IRA and a Roth IRA are types of accounts, not investments

Think of both the traditional IRA and the Roth IRA as a kind of box. Lots of different assets can go in it - stocks, bonds, real estate, mutual funds, index funds, money markets, or certificates of deposit - but it's such good business, Congress limits the amount of money you can put into that box each year .. This is called the contribution limit. Depending on the type of IRA you choose, the tax consequences will be different.

An overview of the traditional IRA

  • Contributions are tax-deductible when made to individuals and families who earn less than the income restrictions for a particular year, which are regularly updated. the IRS. For example, a few years ago I described the effective income restrictions for the 2014 tax year to demonstrate how the rules work. Even if you exceed the traditional IRA income limits for tax deductibility, you can still benefit from tax-privileged set-off (see next point). The contribution limits themselves consist of a “basic” contribution limit and a “catch-up” contribution limit, which people aged 50 and over can use if they so wish. For example, in 2015 the base contribution limit was $ 5,500 and the catchup contribution limit was $ 1,000, so an individual who was 52 years old and otherwise qualified for a traditional IRA would contribute $ 6,500 to their contribution could. Account.
  • The years that your money sits in your traditional IRA, as long as you follow the rules, shouldn't pay tax on the investment gains you generate. That means no taxes on capital gains and no taxes on dividends, interest and rents. Even if you are on millions and millions of dollars in profit as long as it is within the account’s protective boundaries, federal, state and local governments will not get any of it.
  • You can start making withdrawals with your traditional IRA at the age of 59.5 without paying the early withdrawal fee. You must make withdrawals and pay tax on those withdrawals (all withdrawals will be taxed, including the capital previously deposited as it was tax deductible at the time of contribution) up to the age of 70. 5 years old so you can Too much money is accumulating in the tax haven.
  • Traditional IRAs and Roth IRAs are extremely useful asset protection tools. Under the current three-year bankruptcy protection limit, set on April 1, 2016 and adjusted every three years, an investor can have up to $ 1,283,025 in combined balances with both types of IRAs and be exempt from creditor claims. Married couples can effectively double this amount as both the traditional IRA and Roth RIA must be owned by an individual (there is no common IRA). This is one of the main reasons why it is almost always advisable to seek the advice of a qualified, reputable bankruptcy attorney before making serious decisions when you run into financial trouble. The worst thing you can do is take your traditional IRA or Roth IRA review and then declare bankruptcy as it would have cost you years, maybe even decades, to rebuild if you emerged from the courthouse with pension funds intact.

An overview of the Roth IRA

  • Contributions to a Roth IRA are not tax deductible at the time they are created. Unlike a traditional IRA, and under certain minimal conditions, if you need to withdraw your previous principal contributions, you can do so without a criminal record with no tax deduction, although you will not be able to replace the funds. again as soon as they leave the account. There are tax ramifications for any investment gains or other funds beyond the historical contributions to the Roth IRA if taken before the age of 59.5.
  • Over the years the money is in the Roth IRA as long as you follow the rules (e.g. don't use borrowed funds that lead to the unrelated business tax, don't invest in MLPs, etc) profits you make, should all be tax free.
  • There is no compulsory distribution age. If you live to be 105 years old and end up with a $ 25,000,000 Roth IRA because you discovered the nearest McDonald's, Home Depot, Microsoft, Apple, or Berkshire Hathaway, you don't have to give a penny of it was It is up to the federal, state and local governments to retreat and spend it under current rules.
  • The same bankruptcy protection measures that cover the traditional IRA also apply to the Roth IRA (see above).
  • The tax fee requirement is so extraordinary for a Roth IRA that Congress specifically limits it to individuals and families with adjusted gross income below certain set thresholds. These are updated every year. A few years ago, I hatched the Roth IRA Income Capping Rules then in effect, which can serve as a useful template for understanding how the calculations work.

The Roth IRA tax benefits are so extraordinary that many Americans who fail to qualify because they make too much money practice a technique called a "back door Roth IRA," which involves funding a traditional IRA. Roth IRA.

Where can I open a Roth IRA or a traditional IRA?

As mentioned earlier, a Roth IRA and a traditional IRA are both types of accounts, not investments, so you can open with many different types of financial institutions with either. If you go to a bank or credit union, they may offer IRA but only allow you to bring in certificates of deposit. If you own both types of IRA with a discount brokerage firm like Charles Schwab or Scottrade, you can use almost anything that is publicly tradable, including exchange-traded index funds like SPDRS or blue chip stocks. Some investors who only use mutual funds for their retirement prefer to open a traditional IRA or Roth IRA directly with a mutual fund family like Fidelity or Vanguard.

How much money do I need to open a Roth IRA or a traditional IRA?

The minimum opening balance for both types of IRA is set by the financial institution with which you open the account. Some require $ 1,000 to $ 3,000. A few can get you as little as $ 100 on the condition that you demonstrate at least that much per month for a period of time to demonstrate that you are serious about building wealth.

Can I have both a traditional IRA and a Roth IRA?

Absolutely. Millions of Americans do. You can even add funds to both in the same year, provided your total contribution does not exceed the contribution limits applicable for the year. For example, in a year where a person who is 37 years old can only contribute a total of $ 5,500, that person could put $ 2,000 in a traditional IRA and $ 3,500 in a Roth IRA because , combined, they are still at or below the limit of $ 500. If you exceed the contribution limits and do not correct them within a certain time window, the government will assess confiscatory taxes that will ultimately wipe out the surplus balance.

Can I have a Roth IRA and / or a Traditional IRA Plus at work?

Yes. In addition to funding a Roth IRA or Traditional IRA every year, you can also fund a Traditional 401 (k), a Roth 401 (k), a Solo 401 (k), a 403 (b), SEP IRA, or SIMPLE IRA another qualified plan. These often have other advantages of their own, including unlimited bankruptcy protection to the bankruptcy protection offered on the IRAs discussed in this article.