It surprises me there are so many parents who are clueless about the best retirement vehicle ever created. If you don’t know what I’m talking about, then here is a spoiler alert: the Roth IRA.
The Roth IRA is my favorite retirement vehicle ever and especially for parents. If you are unfamiliar with what a Roth IRA is then let me explain.
A Roth IRA is an individual retirement account that you own. It can opened up at any brokerage firm or bank (i.e. TD AMeritrade, Fidelity, VanGuard, ect).
In a Roth IRA you make contributions on an after tax basis. This means if you earn $50,000 per year and make a contribution of $3,000; you still pay taxes on $50,000.
However, all of that money grows tax free and can be withdrawn tax free in retirement. Example: If you contribute $5,000 a year for 30 years and earn 7%; you will have $472,303 in tax free money!
How the money is invested is up to you. Think of a Roth IRA as a shell account and you decide what goes into it. You can invest in mutual funds, index funds, stocks, bonds REITs, ect. You have a plethora of options.
Money that is invested in a 401(k) or Traditional IRA is taxed when withdrawn for retirement. If this hasn’t convinced you to open a Roth IRA, then let me give you some more reasons to open a Roth.
More Reasons to Invest in a Roth IRA
– You always have access to contributions without taxes or penalties
– There are income limits. If you are married, file jointly, and earn over $183,000 a year then you will be limited to how much you can contribute
– You never have to withdraw the money
– The money can be received by your children tax free in the event of your death
– The Roth may not be around forever