What is a Roth IRA?

Hey, everyone, welcome to another Financial MD Didactic Minute. I’m John Solitro. Thanks for joining us. So, I wanted to go over a topic today that we get tons of questions over the years. And this is not necessarily something that is particularly timely, it can be applied anytime throughout the year. But it’s about the subject of Roth IRAs. What is a Roth IRA? How does it work? What’s the benefit? What’s the best time to do it? So, I’ll try to just distill this in 2 minutes or I guess a minute 30 seconds now.

 

A Roth IRA is an investment account. Inside this investment account, you can invest in many things, stocks, bonds, mutual funds, annuities, all sorts of things. So, Roth IRA doesn’t mean a certain type of investment, it just means a certain type of account. And so, a Roth IRA is something where you put money from your bank account or wherever you have cash, okay, so it’s not payroll deducted, it’s something you set up yourself. You take that money, you put it into a Roth IRA, and then you and your adviser invest it however you think is best. The beauty of a Roth IRA is that as it grows over the years, you don’t pay taxes on the growth each year. And then when you want to pull the money out in retirement, it’s all tax free, unlike a 401(k), or a traditional IRA.

So, what’s the benefit of that? And why do I talk to residents about that all the time, because a Roth IRA has income limitations on it, meaning once you make more than about $200,000 as a couple, or about $120,000 as an individual, you can’t put money directly into a Roth IRA. Now, there is a backdoor Roth, which we can talk about in a later video, but for the most part, I encourage Roth IRAs for residents. And this year, which is timely, because of everything going on, the deadline of when you can put money into a Roth IRA for the previous year, because there’s limits of $6,000 a year right now that you can put in per year, you could put in money for 2019 right now, when usually you’d have to do it by April 15th of that following year. So, because they extended the tax deadlines to July 15th, you have until then to put money in for the prior year, and still have room to put money in for 2020.

So, this is John, with your Financial MD Didactic Minutes. I want to encourage you to feel free to shoot us questions if anything pops up, or I didn’t explain something well enough in 2 minutes. But we’ll see you next time.