How do myths about Traditional or Roth IRAs get started? Typically, you’ve heard myths from an acquaintance who knows someone who knows someone. That person then tells you that they once had either a bad advisor, or had a bad experience, and there starts a rumor/myth. Let’s move past all of that, and get to the truth of the matter.
I make too much/too little to make contributions
Even if you’re only able to contribute $50 a month to your retirement account, it’s SO much better than nothing. Starting to save in your early 20s means you can set aside less and come away with more once you reach retirement age. Set goals for yourself, and make a decision today that will impact your future.
It’s true that if you make $196,000, or more if you’re filing jointly (married), you cannot fund a Roth IRA. But you will, however, be able to fund a traditional IRA with no problem. But there’s a caveat that can make the rules more confusing. Your household income, as well as whether you or your spouse have access to a workplace retirement plan, like a 401K, can change eligibility. These factors impact how much of your traditional IRA contribution the IRS will allow you to deduct from your taxes.
All IRAs are the same
With a traditional IRA, the money you contribute into your account is contributed in tax-free. Once you reach retirement, your withdrawals are taxed as ordinary income.
Roth IRAs basically work the opposite way. Your contributions are made with after-tax dollars, but withdrawals can be made tax-free in retirement. The annual contribution limit for both traditional and Roth IRAs in 2017 is $5,500 if you’re under 50, or $6,500 if you’re 50 or older.
However, as stated above, not everyone can open a Roth IRA. If you earn more than $133,000 as a single tax filer this year, or more than $196,000 as a married couple filing jointly, you won’t be eligible to contribute to a Roth.
I’m too young to start saving for retirement
Impossible. The sooner that you start saving for retirement, the more interest you’ll accrue over your lifetime, also referred to as compound interest. Starting retirement savings in your 20s gives you a huge advantage over those who start a decade later. Again, due to compound interest. If you’re able to save just $2,000 a year beginning at age 25, (about $166 a month), you will have saved more than $500,000 by retirement age. If you start saving ten years later in your thirties, you will save less than $250,000 saved. Kind of speaks for itself. Start as early as possible.