Yes, folks, January has come and gone, and if you’re kicking yourself for not tackling your 2016 money resolutions yet, end the self-flagellation today – with a Roth IRA. The Roth IRA is as close to perfect as it gets for a young Retirist’s starter investments, and today I’ll take you through what you do with one, why you want one, and how to get one.

The skinny on Roth IRAs

  • Roth IRAs are a way to invest money for your retirement in stocks, bonds, etc. – they are a type of “retirement vehicle.”
  • You don’t need an employer to open a Roth IRA. You can go to any financial institution that offers Roth IRAs and open one, similar to a savings account (but a badass savings account).
  • You can put up to $5,500 a year in a Roth IRA, if you make $117,000 or under annually as a single tax filer. (When you make over that amount, your contribution limit begins to be scaled down to under $5,500. You can see all the contribution limits for 2016 here.)

Why the limits? Because the Roth IRA is designed to help those with lower incomes to start saving for retirement, and it packs awesome tax advantages to support that goal, advantages that presumably the wealthy don’t need. Speaking of which…

Why you want a Roth IRA

  • You put in post-tax money (the money that hits your bank account from your employer, already adjusted for taxes), and your earnings grow more or less tax free. This is massive. With regular Roth and 401(k) accounts, you pay the taxes upon withdrawal – so you’re footing the bill while in retirement – but with Roth IRAs, you’ve paid your taxes up front and therefore get to sit back and enjoy your money’s growth with no additional tax. Pretty awesome.
  • There are no minimum withdrawal rules, unlike regular IRAs or 401(k)s, throughout your lifetime. Minimum withdrawals mean you’re required to withdraw money from the account after a certain age, and these rules apply to both IRAs and 401(k)s – not so with the Roth IRA. This makes it a unique component of your retirement portfolio and income strategy in your golden years.
  • Finally, Roth IRAs give you more ways around the 10% penalty on pre-retirement withdrawals than any other typical retirement vehicle. Specifically, you can withdraw what you put in (though not what you earn) without any penalty. That means if you have a tight budget and an emergency comes up, the Roth IRA can function as an emergency fund (though I would caution you to still try and treat this, like any other retirement account, as a “set it and forget it” account that you should endeavor not to touch).

Get your Roth IRA today, super easy

The bottom line is that the Roth IRA is arguably the best option out there for young retirement savers and is a more or less no regrets decision. My suggested place to open one is Vanguard, where I know there aren’t massive fees eating at my money and the passive investing strategy matches the “put the money away and forget about it” mindset I have about retirement savings. (You’ll need $1,000 minimum to open the account.)

If you haven’t opened a Roth IRA before, I can’t imagine that you don’t have questions, so leave a comment, and I’ll try to help. And 2016 marches on!

open a roth ira february 2016 retirist“I can grow my Roth IRA money tax free? All of it?”