5 Roth IRA Mistakes That Cost You $$$

in this video i'm detailing five mistakes that people often make with their roth ira are you guys making these mistakes keep watching this video to find out what they are and how to avoid them [Music] most of you guys aren't thinking about retirement and i know that because the majority of my audience is actually between the ages of 18 and 34. on top of that i know that most of you guys skew on the younger side of that because a lot of you guys are from tiktok as well so when it comes to retirement i know that it seems really far away i mean i'm myself in that age demographic even for me it feels super super far away but it's still really crucial in building your financial foundation and mastering your money so in today's video i wanted to break down the five mistakes that i most commonly see people making with their roth ira if you watch this video until the very end you'll learn more about the nuances about the roth ira and the common mistakes that people are making and in doing so hopefully you'll save yourself thousands of dollars down the line that you can actually put towards your retirement and basically enjoy in retirement for me in particular i definitely just want to play golf 24 7. hopefully my back doesn't give out but i want to visit some really cool golf courses and travel the world doing that so that's why i invest in my roth ira also only a small percentage of my viewers are actually subscribed so if you do end up enjoying this video consider subscribing it's free and you can always change your mind but first i want to clear up the differences between a roth ira and a traditional ira because i know that there's somebody out there watching that is confused on what the differences are between them for those of you that need a refresher ira stands for individual retirement account and the roth version of this is actually funded with after tax dollars since it's funded with after tax dollars basically what that means is is that as your earnings in the account grow it's actually going to be tax-free versus with a traditional ira it's actually taxable earnings and interest so the biggest differences between the roth ira and the traditional ira are in the manner in which they're taxed in a traditional ira your contributions are basically tax deductible so you basically get a tax savings when you contribute into it subsequently your gains basically your earnings and interest are actually tax deferred what that just basically means is that you pay taxes on when you withdraw the money from your traditional ira the main advantage of why people like to have a traditional ira is basically for the tax deduction up front because they get to save some money on their taxes the roth ira however is basically what the investment community prefers since all the earnings in a growth tax-free and that's actually worth a lot to some people if you'd like to learn more about the differences between the roth and the traditional ira i actually have a video on that which i'll link for you guys in the description below and hopefully right up here so now let's talk about the mistakes that people commonly make in a roth ira and number one is basically skipping a roth ira since you already have a 401k so originally iras and roth iras were created to basically allow for americans to invest in retirement who weren't offered an employer-sponsored basically retirement account such as a 401k but since most of us watching and most of us are in the workforce we typically have an employer that basically offers us a retirement vehicle such as a 401k or a 403b and i think one of the common mistakes here is like okay i'm already saving in a 401k why should i even have a roth ira but here's why one of the main benefits of having a roth ira is basically is that it's very flexible you can carry it around wherever you go the earnings are actually going to be tax-free versus a traditional 401k the earnings are not tax-free so it's less flexible in that regard also with a roth ira you can basically choose whatever you want to invest in versus in a 401k oftentimes your employer matches up with a basically financial institution and they provide you a certain selection of funds that you can actually invest in these funds are typically mutual funds with higher expense ratios aka higher fees and sometimes they're just not as flexible as say investing in whatever you want in a roth ira so basically a roth ira gives you more control over your investments in my opinion the best way to prioritize your retirement contributions are in the following manner first max out your company 401k up to its match so if your company offers a 401k and a match percentage you're always going to want to contribute up to that match percentage because that's basically free money after you max out your contribution match that's when you want to start investing in a roth ira or maybe even a traditional ira you want to max that out i mean the contribution limits on roth iras are pretty low so six thousand dollars a year if you can within a roth ira you can invest in a multitude of things but if you want to get started with just a very basic portfolio for your roth ira you can check out my video on simple investing portfolio it's basically a three fund portfolio so it only holds three different types of investments and it's a very safe and well diversified way to basically set up your portfolio for your roth ira retirement you can also watch my own video where i reveal my own roth ira and tell you what's in it and it's basically a simplified version of the three fund portfolio with a slight modification okay so after you've done steps one and two that's when things get pretty flexible you can continue to invest into your roth ira up to the max contribution limit for the year or you can just take those extra earnings that you might have to invest in a regular investable taxable account now i want to be clear if you're at least investing something in retirement versus nothing that's always going to be better so as long as you're doing some of these steps that's good enough don't feel pressured that you feel like oh man i'm not doing steps two and three so all of a sudden i'm gonna be poor in my retirement that's absolutely not true the key with investing for your retirement is consistency consistency consistency over a long period of time now the second mistake i notice people making with the roth ira is either not earning enough to contribute or basically earning too much to contribute to their roth ira and not knowing the rules in order to have a roth ira it's interesting to note that you actually need something called earned income according to investopedia.com earned income is basically defined as this earned income includes wages salaries bonuses commissions tips and net earnings from self-employment according to the irs so basically you need to be paid in order to have a roth ira that means if you're a college student watching this and you're not actually earning any income maybe you're just being paid under the table that doesn't actually count you actually need what's called wages or salaries some of you guys might have trading accounts in which you take stock profits and gains but actually capital gains do not qualify as earned income so they do not qualify you to contribute to a roth ira either other examples that are not earned income include unemployment workers comp social security interest income and rental property income the bottom line is is that you need to be working in order to contribute to a roth ira so just remember that the other mistake that people make with mistake number two is that they earn too much to contribute so this is the flip side of the coin if you earn over 140 000 a year individually you actually do not qualify to contribute to the roth ira if as a couple you earn more than 208 000 combined annually then you can't contribute either now one method you can use to actually get around this income limit is through what's called a backdoor roth ira this is basically where you contribute to a traditional ira first and then you just convert it into a roth ira now it's pretty dumb that the irs just kind of lets you do that but apparently that's a loophole that's completely legal and if you're interested in that there are a lot of youtube videos detailing on exactly how to do that so mistake two just comes down to knowing the actual contribution limits of a roth ira and actually earning earned income to contribute to a roth ira the third mistake people are making with the roth ira is simply just withdrawing early specifically their earnings when it comes to a roth ira you're actually able to withdraw your direct contributions to your roth ira at any time without any penalties however the earnings or the profit on your roth ira actually follows a different set of rules and for that you actually need to know the following number one if you withdraw any of your earnings before the age of 59 and a half you're actually subject to a 10 penalty now that age requirement is in there because they're basically incentivizing you to save for retirement and they don't want you pulling out your contributions excuse me your earnings early now there are some exceptions in which you don't need to actually pay the 10 penalty most notably for a first-time homebuyer you're able to take out 10k at any time without any penalty at all the other exceptions basically i'll bring them up on the screen right here so that you can see them really quickly if you'd like to pause the video you can do that but i'll also leave them in the link in description below for you guys if you'd like to check that out after the video the next thing you need to know about the earnings is actually something called the five-year rule but in any case you shouldn't be withdrawing from your roth ira early anyways especially not the earnings with your roth ira you want to be investing money for your retirement and you want to be stocking away that money consistently over time if you do anticipate needing the money before retirement i would actually say you shouldn't be investing in a roth ira because by withdrawing early you're actually destroying all the benefits that you get from a roth ira the fourth mistake i see people making with their roth ira is that they actually invest in speculative short-term investments such as penny stocks now this is a mistake people just might make because they want to get rich quickly and if you've watched my channel you know that i'm all about long-term slow growth slow investing but gains over time if you're a frequent watcher of my channel you know that i prefer a lower risk get rich slow type of mentality when it comes to my investments when it comes to your retirement account this is something that you don't really want to be too risky with because simply just by having our money invested in a very safe but diversified investment over a long period of time we can take advantage of compound returns and as long as we let compounding work for us in a retirement account then there's no need to take a short-term speculative risky play we know that as long as we contribute to our roth ira every single year six thousand dollars for the next 30 to 40 years and we gain the average annual return of the s p 500 of about seven to eight percent we're going to have well over a million dollars by the time we retire so my point here is guys if it ain't broke don't fix it i would hate to see you guys invest in something in like penny stocks in the hopes of getting rich but then actually failing and then just not having any money to show for it at the end of the day now obviously i can't tell you what to do but i'm just saying if it were me i'm not investing in penny stocks so this mistake is more just about risk management and proper risk management for our retirement we want to be making safe diversified bets in our roth ira because these are the funds that we're going to be living off of in retirement and if we make speculative and dumb plays in a roth ira it just may come back to haunt us in the future all alright guys the fifth mistake that people make with the roth ira is actually contributing too much to their roth ira now this is a mistake that might happen if you have more than one ira so a lot of people don't know this but you can have multiple iras with different brokerages now the contribution limit is six thousand dollars a year in 2021 but when you have three or four different iras you might forget how much you've contributed to each one if you accidentally contribute over the six thousand dollar limit the penalty for that is actually six percent per year that's per year until you correct the mistake and they won't actually tell you this super upfront either so if you find yourself in a situation where you actually contribute too much what you want to do before you file your tax return is basically take out any of the excess contributions and earnings on your excess contribution of that roth ira if that makes sense now this is actually one of the more uncommon mistakes when it comes to a roth ira but it can cost you a lot of money if you're not organized enough to actually recognize this mistake because it's six percent of a fee per year every single year that that mistake is actually in force that's why it's always important to check in on your roth ira periodically especially if you have multiple accounts across different brokerages always make sure you track how much you're actually contributing to your roth ira because that's important to know as well alright guys i hope you enjoyed this video these are five mistakes that people are commonly making with their roth ira that could cost you some money in retirement make sure to like the video if you got any value out of it consider subscribing i post videos here on youtube three times a week on personal finance and investing lastly thanks to all my patreon subscribers i appreciate you guys being here i'll see you guys in the next one peace

Channel: Humphrey Yang

Views: 241,731

Keywords: roth ira, ira mistakes, investing, traditional ira, roth vs, roth vs traditional ira, roth vs traditional 401 k, roth vs 401k, roth vs traditional tsp, roth vs pre tax, roth vs traditional, roth vs pre tax 401k, roth, roth ira explained, roth 401k, roth ira dave ramsey, how to invest, retirement investing, what is a roth ira, invest for retirement, roth ira investing strategies, invest in roth ira, investing for beginners, investment ideas

Id: WLiNjAD12tc

Length: 11min 25sec (685 seconds)

Published: Mon Feb 01 2021