Why open a Roth IRA? (5/5)
Welcome back to my “Why open a Roth IRA?” series. See the previous posts to catch up, which are linked below.
Compared to an employer-sponsored retirement plan, such as a 401(k) for example, a Roth IRA, like a Traditional IRA, is your *individual* account. If opened with a brokerage firm, you'll have greater control over how it is invested and often have access to more investment options to choose from.
If you have a Roth 401(k) or Roth 403(b), you are often limited to only mutual funds. With the help of an experienced financial advisor, however, you may be able to enhance your portfolio with individual stocks and ETFs alongside mutual funds.
A Roth IRA is not subject to the employer rules and restrictions that may exist in a Roth 401(k) and Roth 403(b). For example, one of my clients is not allowed to access any Roth dollars, even her own contributions, in her Roth 403(b) prior to age 59 1/2 except for hardship withdrawals.
Alternatively, if these dollars were in a Roth IRA, she would be able to withdraw at least the contributions (excluding the growth) at any time and at any age, tax- and penalty free. (See our article here for more information: https://www.thrivent.com/insights/taxes/how-roth-ira-taxes-work-contributions-withdrawals-conversions.)
Moreover, having control, and receiving advice from a financial advisor on the asset class of your investment and your risk tolerance can make a big difference over time. I have come across many Roth IRAs that were opened by clients either on their own or with the help of someone who was not a financial advisor that were invested in cash (like your savings or checking accounts are) that were not growing in the market at all.
In one case, a client had had thousands of dollars in a Roth IRA at a bank, per the advice of his accountant, and it had grown only a few cents over the course of many years because it was, effectively, in a standard savings account.
If you’re in college, only work part time, and/or don't have access to an employer-sponsored retirement account like a 401(k), a Roth IRA is a great option because you can fund it on your own, as long as you earn money from working (there are limitations, of course, so speak with a qualified professional) and benefit early on in your life from compounding, tax-free growth for retirement.
And, lastly: Why should you open a Roth IRA as soon as possible?
No matter your age (retired or not), you must wait five years to access the earnings in your Roth IRA, otherwise you could face penalties.
And, even though you can also use up to $10,000 lifetime withdrawal (including growth) to go toward purchasing, building, or re-building a first home, either for you or for some family members with no taxes or penalties paid on any of those dollars, it has been funded for at least five years to avoid penalties.
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