New Year, New Roth IRA – Starting your Roth IRA in 2021

Estimated reading time: 3 minutes(Last Updated On: June 18, 2021)

It’s never too late to start thinking about retirement. For some, retirement might be right around the corner and for others, it could be a long way off. Either way, the same principle applies to both situations. The sooner you begin thinking about your future financial goals, the faster you can start working to achieve them. 

IRAs have proven time and time again to be great retirement accounts that offers some unique advantages over their competition. Starting early will ensure you receive the full reward of all that these accounts have to offer. One of the most beneficial accounts is the Roth IRA. 

How is a Roth IRA Different from a Traditional IRA?

A Roth IRA is closely related to the Traditional IRA. They are similar in that they offer tax-free growth for investments within them. The key difference between a Traditional IRA and a Roth IRA is when you get your tax break. With a traditional IRA, you pay taxes when you withdraw from it, while a Roth IRA has you pay taxes upfront. Additionally, Roth IRA contributions aren’t deductible like Traditional IRA contributions can be. 

Roth IRAs do not have age restrictions but do have annual income-eligibility restrictions. Certain penalties could apply if you pull from your earnings before 59 1/2, similar to traditional IRAs, but luckily Roth IRAs offer exceptions, making them great accounts for those who get started early!

Why Choose a Roth IRA Over a Traditional IRA?

A traditional IRA can have advantages, like upfront tax deductions when you make your IRA, whereas your Roth IRA has you pay the bill upfront. Your contributions are still taxed as income and don’t lower your AGI. However, any withdrawals you make in retirement are generally tax-free.

One of the great things about the Roth IRA, is that you can draw from your Roth IRA contributions at any time without penalty. Additionally, you can use your Roth IRA funds to buy your first home. If you tap your Roth for a first-home purchase, in addition to using your contributions for the down payment, you could also withdraw up to $10,000 of earnings and penalty-free if the account has been open for at least five years. Qualified higher education distributions are allowed in a Roth IRA, too!

If you’re maximizing your yearly contribution for a Roth IRA, the compounded interest can greatly outweigh the costs upfront. Paying the taxes today while being in a lower bracket may allow you to reap the tax-free rewards later in your life when you retire.

Why I Should Start a Roth Soon?

Roth IRAs follow a very special rule, unlike other retirement accounts. There is a “5-year-rule” that applies when you take distributions from the Roth account. Generally, as long as you have had the account open for 5 tax years and you are over the age of 59 1/2

The 5-year holding period for Roth IRAs starts on the earlier of  the date you first contributed directly to the IRA,  the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or the date you converted a traditional IRA to the Roth IRA. The younger you are when you start and contribute to your Roth IRA, the more you can save for retirement, because you get that tax-free compounding clock for longer.

How Do I Start My Roth IRA?

Retirement accounts, especially the Roth IRA, are great for building future wealth and are best maximized when starting early! Contact an IRA specialist at Quest Trust Company for more on how you can start a Roth IRA or other retirement account and start building equity today. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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