Article written by Kara Perez for Investor Junkie Newsletter
A Roth IRA is a type of retirement-focused investment account that lets you withdraw your earnings without paying a tax penalty. But there are specific rules you must follow for making contributions and withdrawing funds.
While Roth IRAs are handy accounts, they may not be the best retirement account for you. Let’s dive in and see what a Roth IRA is all about.
Who Can Open a Roth IRA?
A Roth IRA can be opened by anyone who is at least 18 years old and has earned income. “Earned income” means money that you can prove to the government that you earned, like a job at your local grocery store. It doesn’t usually mean money earned “under the table” (off the record), like the kind you make babysitting.
If you don’t have earned income but want to open a Roth IRA at 18, you can open one with an adult who does have earned income. For example, parents who work can open a Roth IRA with their child. The brokerage will use the employment history of the parents to open the account, but the child will have full access to the account and funds.
Is a Roth IRA Right for Me?
A Roth IRA is generally best for people who are in lower-income tax brackets during their earning years than they expect to be during their retirement years. The idea is to pay the tax while you are in the lowest possible tax bracket.
A Roth is also a good idea for people who don’t have access to a retirement plan through work. Only 50% of Americans have access to a 401(k) plan. A Roth is a great way to jumpstart your retirement savings, especially if you start investing at a young age.
Since the Roth IRA rules around withdrawals are more forgiving than other retirement accounts (for both early and regular withdrawals), a Roth can also act as an absolute last-ditch emergency fund. Generally, the advice from financial advisors and experts is never to withdraw money from retirement accounts before you need it. And that’s good advice. But if something terrible befalls your finances, it is easier to get money out of a Roth IRA than other accounts.