Do This Before You Invest In a Roth IRA

In this video, I'll go through the things you need to do before investing in a Roth IRA.

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A Roth IRA (Individual Retirement Account) is a type of retirement savings account in the United States that offers several tax advantages. Here's a breakdown of its key features and how it works:
Post-Tax Contributions: Unlike traditional IRAs, where contributions may be tax-deductible, contributions to a Roth IRA are made with after-tax dollars. This means you don't get a tax deduction for the money you put into a Roth IRA.

Tax-Free Withdrawals: The primary benefit of the Roth IRA is that qualified withdrawals are tax-free. Given that the contributions were already taxed, the principle can always be withdrawn without penalties. Moreover, once the account has been open for at least five years and the account owner is at least 59½ years old, all withdrawals (including earnings) are tax- and penalty-free.

No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs don't have RMDs during the lifetime of the original owner. This means you're not required to start taking money out at age 72 (or 70½ if you turned 70½ before January 1, 2020).

Income Limits: Not everyone can contribute to a Roth IRA. Eligibility is based on your modified adjusted gross income (MAGI). The IRS sets income limits that determine whether you can contribute, and how much you can contribute. If your income is too high, you might not be able to contribute to a Roth IRA.

Contribution Limits: As of my last update in 2022, the annual contribution limit for a Roth IRA is $6,000 for individuals under age 50, and $7,000 for those age 50 and older (these limits are subject to change based on inflation and IRS guidelines).

Flexibility: Roth IRA contributions can be withdrawn any time without penalty, which provides some flexibility. However, it's important to note that this doesn't apply to earnings – if you withdraw the earnings before meeting the qualifying criteria, you may face taxes and penalties.

Conversion: Some people might opt for a "backdoor Roth IRA" if they earn too much to contribute directly to a Roth IRA. This involves contributing to a traditional IRA and then converting that to a Roth IRA. It's a nuanced strategy and can have tax implications, so consulting with a financial advisor is recommended.

Even with all of those benefits, there are some things you're going to want to focus on before investing a Roth IRA which is what we touch on in this video. They include maxing out your health savings account, investing up your employer match, paying off high interest debt, and a few other things.

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Disclaimer: This video is for entertainment purposes only. Everyone's situation is different so do your own research before making any decisions with your money.

[minihorses]

I began contributing to an HSA (and investing it) because of you. :) Oh.. and you are correct about the rehabs too, unfortunately health insurance companies make the rules and tell everyone (including doctors) what they can do.

[randolphh]

We are retired and have a bit of HSA money accumulated. Next year is the last year I can contribute due to turning 65 later in the year.
Be aware that you can pay your Medicare B And D premiums with HSA money. Presently that works out to about $200 per month. For a couple on Medicare this is about $5000 per year. So just on Medicare premiums you will pay over $100, 000 in retirement! This is before getting any care!
So most couples will easily pay $200-300k just in Medicare premiums over their retirement.
If you are healthy, and especially if young and healthy, I highly advise getting HSA qualified insurance and contribute the max, AND INVEST IT!
ITS BASICALLY FREE MONEY!
As you say BETTER THAN A ROTH. No worries about tax brackets now vs then. You can’t lose!

[OnCashFlow]

Great points! I have moved HSA to my most preferred account in the order of investing as well! I would add that some employers also offer contributions to an employee's HSA, so that is another benefit you want to make sure you are getting. Also, if you contribute to an HSA via payroll then you may be able to reduce your FICA tax!

[jaeLAX]

I am all for shaming people into the behaviors that will benefit them in the future. That's why I always preach to family members that they need to exercise on a regular basis, eat whole foods, and sleep 8hrs per day (9hrs for women), and get sunlight in the morning. These simple behaviors will help all of us live longer healthier lives. My personal plan is to work until I drop dead, and I'm using crossfit style of training to help me reach that goal. I'll contribute to my HSA anyways in case of cancer or emergency, but I never want to stop working.

[codelessunlimited]

HSA is very confusing. It says if you're under Medicare you're not eligible or if you have medical insurance you're not eligible. But you can use HSA to cover up the costs but you must meet an HSA approved medical plan. 😵😵😵

[OpenBook]

Hey Jared I appreciate what you're saying, but I need to keep things as simple as I can because my wife cannot seem to understand and grasp how all of these investment accounts work. Even after trying to explain it to her for months she still doesn't really know how we Roth IRA works. If I passed away she has to have the simplest configuration as possible so I'm going to stick with the roth for now ;)

[punisher]

HSA is great if you're relatively healthy but if you have chronic ailments paying out of pocket adds up. I say pad the emergency fund and hope for the best.

[FoivosApostolou]

If you get a car loan and pay it off on time every month, is that still considered debt that will lower your Roth IRA returns?

[TerryDrake]

another question, If you move a Roth IRA from one brokerage to another after the 5 year rule has been satisfied, does that carry over with the move or does the 5 years start over, thanks

[rmep]

So sad Im not eligible for HSA.😢 My deductible is less than 2k

[freedomring]

I agree. People who withdrawal too early from their retirement accounts should be shamed. lol

[juliandaza]

Can you use HSA for medical outside of the USA? Or that differs from entity to entity?

[MMSTUDIOS]

Thanks for the great video. I like the idea of having a HSA account but I believe that I can’t get it because my wife and I both have free health insurance through our employer. Is there another way of opening a HSA account?

[oleskool]

Hi, great video thank you. Can you make a step by step video on how to purchase treasury notes on treasury direct? Thank you

[esbiermann]

Sorry newbie but confused - my Fidelity guy said I should do a Roth IRA instead of a traditional because I was over the income limit of I think 74K and its' a better choice? Your income limit spiel explained here confused me. I still don't get the differences between the two and pros/cons...

[breezy]

Anyone able to explain to me what it means to max out a 401k. If an employer matches you at 6% and you match that. Is that considered maxing out or is it when it comes to choosing what percentage you are allowed to max out at with the total limit being at $20, 000 +max for a 401k?

[Estates]

Great video's as always!! Do you have a service where we could talk about investing one on one on phone? Keep up the great work

[TerryDrake]

If I open a second Roth IRA at another brokerage would the new Roth IRA have another 5 year rule even though I've already satisfied the 5 rule with the first Roth IRA ?

[ChopsOnTheBlade]

I can't seem to find the answer to this question anywhere on the web -- is it advisable to have my Roth IRA account and my brokerage account for playing the stock market at the same place? For example, if I have BOTH of those accounts at Fidelity for instance, is that okay? Or is better to have (for example) my Roth at Fidelity and then my stock account through Vanguard?

[nominnaidan]

Question: If you’re paying tax on your annual basis on your roth IRA investment i cannot say it’s tax free. Also it’s invested in stock market the downside potential can rip off the account. Average ROR for retirement seems 3.6% in 10years of analysis. If you paying tax in the current year it’s taxable on every interest you earn 😳