For newcomers getting started in investing, or those who just want to ensure they’re making the wisest moves, experts generally have one piece of advice: Open a Roth individual retirement account.
“There’s just no question that that is the better place” for their money, according to IRA expert and certified public accountant Ed Slott.
A Roth IRA allows investors who qualify to set aside after-tax money up to a certain limit each year.
One key advantage to Roth IRAs is that the original contributions can be withdrawn at any time for any reason, tax- and penalty-free, at any age, Slott said.
The earnings on the money you invest will also grow tax-free. However, to take those earnings out without having to pay any penalties, you will generally have to wait until after a five-year holding period has passed and you have reached a minimum age of 59½.
If you meet those two tests, anything that comes out of a Roth will be income tax-free for life, Slott said.
What’s more, Roth IRAs, unlike other accounts, also offer the most growth acceleration on your money, he said.
“Tax-free money always grows the fastest, because it’s never eroded by future taxes,” Slott said.
Who can invest in a Roth IRA
Importantly, you can start contributing to a Roth IRA starting from any age if you have taxable compensation.
In 2023, investors may put up to $6,500 in traditional or Roth IRAs (or $7,500 if they’re 50 or older).
There are certain limitations when it comes to Roth IRAs. Notably, your modified adjusted gross income must be below $138,000 in 2023 to contribute up to the limit, provided you file your federal tax return as single, head of household or married filing separately. Alternatively, that income must be less than $218,000 if you are married filing jointly or a qualifying widower.
(Phaseouts apply for contributions from individuals and couples with incomes above those thresholds.)
Why Roth IRAs are a ‘multi-purpose account’
When meeting with investors who are just getting started, Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners, said she often steers them to Roth IRAs.
“The Roth, I always feel, is a multi-purpose account, especially for younger investors when we talk about first investments,” Sun said.
Roth IRAs can serve two purposes: It can get them started on long-term investing, but at the same time help them sock away money that can be accessed in an emergency, she said.
Importantly, a Roth, like any IRA, can invest in anything, Slott said.
“The Roth is just the name of a container, a category of retirement accounts,” Slott said. “The Roth is not, per se, an investment.”
The way you invest the money inside a Roth IRA account can be adjusted to suit your goals.
What you choose to put in the Roth IRA can be either savings or investments.
Regardless of which way you choose to allocate your funds, this can result in tax savings compared to other non-Roth accounts, Slott said.
‘Getting started is probably 80% of the effort’
The advantages of Roth IRAs make it so funding it should be your first priority every year, Slott said. If you reach the limit you can contribute, then you can allocate money elsewhere, he said.
Notably, investors who are just getting started should not feel discouraged if they cannot maximize their contributions, said Jude Boudreaux, a certified financial planner and partner with The Planning Center in New Orleans.
“Getting started is probably 80% of the effort,” Boudreaux said, adding that investors can begin with $100, $500 or whatever they can afford.
“Do what you can now, and then build from there,” Boudreaux added.