Roth IRAs and How They Can Help You Retire Early

hey guys zamon and christina from our rich journey today we are talking about the roth ira one of the three pillars of financial independence and retiring early we have talked about the 401k we've talked about the hsa but we haven't talked about the power of the roth ira when it comes to investing for financial independence and retiring early so on today's video we are going to show you some new things about the roth ira and talk to you about how it's so powerful when it comes to pursuing fire if you're new to our channel our channel is all about making money saving money and investing money on the road to financial independence amana and i pursued financial independence for eight years we reached financial independence quit our federal government jobs and retired here in portugal now we talk about the ways that we reach financial independence and a lot of it had to do with proper investing we have so many different investing accounts but we always focused on maximizing our tax advantages when it came to investing and so like aman said we talked about our 401ks we talked about our hsa in this video we're going to talk all about the roth ira we're going to talk about why it's so great in terms of tax advantages we're going to talk about how it's so unique and how it helps people on the road to financial independence and then we're also going to distinguish the roth ira from some of the other different retirement accounts so maximizing your tax advantage accounts is so important because you're protecting more of your money and you're paying less of it in taxes which means more of your money gets to grow so let's first talk about all of the tax advantages associated with a roth ira i love that maximize your tax advantage accounts to minimize the amount of tax that you pay that should go on a shirt so let's first talk about the process of putting your money into a roth ira and how that's taxed so when you're putting money into a roth ira you're using after tax dollars you're not getting tax deductions when you're putting your money into your account but because of this when you go to pull your money out of your account once you reach 59 and a half you can actually pull all of that money out tax-free that money also grows in your account tax-free so money growing tax-free that you can pull out tax-free it's a win-win account yes so it means all of your dividends all the money that's growing all of the capital gain associated with this roth ira gets to grow tax free so let's answer some big questions about contributions and related to fire when you contribute to your roth ira your contributions you can pull out at any time tax free and penalty free notice i said your contributions now this is a early retirees dream but your dream gets better if you have a 401k or a traditional ira you can roll that money over into a roth ira and start to withdraw that money early penalty free we talked about this strategy in a previous video called the roth conversion ladder and how you can access your retirement money early go check out that video to really understand the process for doing these roth conversions but the ability to be able to do this with a roth ira is amazing for early retirees yes it is such an amazing account because we have a lot of people that reach out to us and ask us how can you retire early all of my money is in my 401 k i can't access it earlier but you actually can if you use a roth conversion ladder by taking your 401k converting it or rolling it over into a traditional ira and then rolling that over into a roth ira there's a lot of steps involved in it and like iman said we did a video on it so we'll leave the link to the video in the description below so just to emphasize it to bring it home just because you have money in traditional retirement accounts doesn't mean you have to wait to a traditional age you can access that money earlier through a roth conversion ladder now you need to be very responsible when you do this it also means that you need to plan ahead but like me and christina did on our fire journey we put together a fire plan now there is one thing i do want to note about pulling out your money penalty free before you've turned 59 and a half there is another way that you can do that under the cares act and this was established in 2020 that allows people to pull out up to a hundred thousand dollars from their roth ira or their traditional ira if they have a coveted related reason for doing so but again that is only the one hundred thousand dollars and it has to be for a covid related reason so the next thing that we love about roth iras is that it is a great tool to build generational wealth with roth iras you actually don't have a minimum distribution requirement that means there's no requirement that you have to begin pulling out your money now this is different than a traditional ira and a 401k with both of those types of retirement accounts there is a minimum distribution requirement you have to begin pulling out your money by age 72 this is not a requirement with the roth ira this means that if you don't need the money in your roth ira or if you don't want the money in your roth ira you can continue to allow it to grow and you can pass it on to your heirs after you pass away the next amazing thing about a roth is there is no minimum age to open a roth all you need is taxable income and you can open a roth that means if your seven-year-old child has taxable income they can open up a roth ira and just watch that money grow i wish i knew about this when i was seven years old and i was washing cars or mowing lawns because that money would have been in a roth ira and i would be a trillionaire right now well probably not a trillionaire but the point is you don't have this age requirement with roth iras you can start contributing to them as soon as you have taxable income now we love this about roth iras because if you're thinking about pursuing financial independence or if you want your children to begin thinking about pursuing financial independence the key is getting your money into it into a retirement account as soon as possible because your money can grow through those investments for a longer period of time and again when it's in a tax advantaged account you get to protect more of that money now this is very different than a 401k for example with 401ks employers can put limits as to the age that their employees need to be in order to qualify for a 401k now the oldest that they can put that age limit at by law is 21. but more than 50 percent of employers in the united states require that their employees be 21 in order to begin investing in the 401k plan with a roth ira that does not apply so if you have the ability to open a roth ira do it as soon as possible let that money start to build wealth as early as possible because the longer it's in there the greater that amount will be and i just want to add one more thing for people that are under 18 if they want to open up a roth ira it needs to be a custodial roth ira because people that are minors cannot have their own account you need to have a custodian account for that but there are custodial roth iras that you can open for your children if they have taxable income another thing that makes roth iras so great is that you can have a roth ira account for a spouse that does not work it's amazing so the working spouse can actually contribute to the non-working spouse's roth ira up to the maximum so this means you can actually have two fully maxed out roth iras even if only one spouse works and that's something that we did when christina was in law school we did not let up on our investments in fact we doubled down you see this leads to something else about the roth ira if you miss the window to contribute to it you can't ever go back so for us we had to take advantage of every single year that we were eligible to invest in a roth ira because once you don't invest in that year you can't go back and make up for it so we've talked about how the roth ira is taxed differently we talked about how it's different in terms of minimum required distributions we also talked about how it's different with age restrictions but one other thing that makes the roth ira so special is that it's not tied to an employer's investment account it's not tied to something like a 401k is to an employer and this makes it so beneficial because with a roth ira you have so many other options for investing as compared to a 401k so you can buy individual stocks you could buy bitcoins in your roth ira if you're wanting to we don't recommend that but you can buy anything that you want to as long as the brokerage company that you have your roth ira with offers that ability this is something that you don't have with a 401k and it makes the decision between funding a 401k and a roth ira a hard decision for a lot of people but go back to our video where we talked about the order of investing because if your money is limited there is a order in which you must prioritize your investments do you put it in your 401k first in your roth ira in your hsa in whatever those accounts may be you should have that plan in place but the roth ira when it's stacked up against the many other accounts that you can invest in it is a very powerful account for those pursuing financial independence now there's one thing that we do want to point out with a roth ira if you have a modified adjusted gross income that falls above a certain threshold you cannot contribute directly to your roth ira so for single individuals roth ira contributions aren't allowed if the modified adjusted gross income is 139 000 or more for 2020 and for married people filing jointly roth ira contributions aren't allowed if the modified adjusted gross income is 206 000 or more for 2020. but with a backdoor roth ira you can actually work around these income requirements by taking money from your traditional ira and converting it over to a roth ira this means you can have a roth ira without going about the standard way for creating one and distributing money directly into a roth area now a backdoor roth ira is very complicated we're going to save that for another video but we do want to just let you know that there is a way to have a roth ira even if you surpass those income thresholds so those are the things that we like about the roth ira for those pursuing fire if you don't have one you should seriously consider opening one and if you already have one we hope that you're maximizing it to the best of your ability and as usual if you like this video please give it a thumbs up subscribe to our channel and join the [Music] journey you

Channel: Our Rich Journey

Views: 356,839

Keywords: Financial Freedom and Early Retirement, Our Rich Journey, Roth conversion ladder, how to retire early, How to Retire with No Money, how to retire early with roth ira, Vanguard Roth IRA, Fidelity Roth IRA, Roth IRA vs Traditional IRA, should i invest in roth or traditional 401k, investing in roth ira and 401k, Is it better to invest in Roth IRA or 401k, investing in roth ira for financial independence, backdoor roth ira, roth ira strategy, roth ira versus traditional ira

Id: sJW-3b36oRY

Length: 11min 30sec (690 seconds)

Published: Sun Sep 13 2020