Not Everything You’ve Heard About Roth IRAs Is True

There’s a few misconceptions out there about Roth IRAs, I’m here to set them straight.

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We're back with another edition of my Financial Freedom Newsletter! This time we're going to tackle some common misconceptions about Roth IRAs.

1. You can't access your funds until you reach age 59 1/2

This is just not true! You can withdraw your contributions at any time, but any investment gains will be subject to taxes on withdrawal. If you do decide to withdraw before reaching the age of 59 1/2, it's possible that you'll have to pay a 10% penalty as well.

2. Roth IRAs are only for retirement 

No way! Actually, Roth IRAs are one of the best ways to save for college tuition and other educational expenses. You can contribute up to $6,000 a year ($7,000 if you're 50 or older) every year toward these goals. If you don't use all of it up in one year and want to carry over some money into the next year, there's no problem with doing so—and it could save you thousands in taxes later on!

3. If your income is too high, you can't contribute to a Roth IRA

Not true! As long as your modified adjusted gross income falls below certain limits (which change each year), then you'll be eligible to contribute to a Roth IRA. If your income is higher than allowed, you can contribute to a traditional IRA and convert it into a Roth, just be aware of tax implications. 

4. Minimum distributions are required

Not true! You can leave your IRA untouched for as long as you want! If you’re still working, you don’t have to begin taking withdrawals from your Roth until you turn 70.5 years old. This is unlike a traditional IRA, which requires that you start taking required minimum distributions by age 70.5 and continue taking them annually after that.

5. Anyone with an IRA can convert it to a Roth

This is true, but only if the account holder has been contributing to their traditional IRA for at least five years. Because Roth accounts are funded with after-tax dollars, this means that those dollars have already been taxed, so there’s no tax benefit in converting your traditional IRA into a Roth. However, there are plenty of other reasons why you should consider converting your traditional IRA into a Roth. If you still have time before retirement, it’s wise to convert your IRA to a Roth because your investments will grow tax-free & you’ll likely be in a higher tax bracket closer to retirement than you are now. 

To sum it all up:

Roth IRAs are an amazing tool for building wealth. You can contribute $6,000/yr and reap the rewards TAX-FREE for years to come. Starting as early as you can gets the compounding snowball rolling, the best time to start one was when you were 18, the 2nd best time is now. 

Take a look at a Roth IRA compounding at 7% with a 2% dividend yield annually from age 18 to age 60. The portfolio ends at $2,421,168.80 by the time you reach age 59.5 and can withdraw tax and penalty-free. 

Starting a Roth IRA should've been the first thing I did when I started investing but hey, you live and you learn. I hope I've inspired you to start a Roth IRA & you see the benefits of having one.

Speaking of Roth IRAs, let’s check in with mine.

I follow what @valuestockgeek calls the “Weird Portfolio” and it should be able to withstand any type of macro environment. Since 1970 it has an average annual return of 7.7%, with the harshest decline being 19%, so it’s subject to less boom and bust of a 100% stocks portfolio. It’s balanced between the US and the rest of the world, and contains a balance of defensive and offensive assets. I even hold assets that aren’t correlated to the stock market. I’ve contributed $3,000 so far and aim for a 20% distribution across 5 sectors: US Small Cap Value, International Small Cap Value, Real Estate, Long Term US Treasury Bonds, and Gold.

I invest in 5 Vanguard Funds and 1 Gold ETF. The tickers are:

VSS

VBR

VGLT

VNQ

VNQI

SGOL

Here’s how the portfolio has done:

My goal is to max this account out every year and take from it only in emergencies or to buy real estate. I’ll be periodically writing about this account and tracking its growth along the way!

What do you think about Roth IRAs?

Are they the best way to create wealth? Is there a better path? Let me know on Twitter @DrDividend47 or on email [email protected]!

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Helpful Resources Are Here!

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