Roth IRA Accounts May Allow You to Withdraw Money Before You’re Old

As of September 2018, the median household income in the United States is $61,372.

In some parts of the country, that will help a family live a middle-class existence without many money woes, but for most of the population, it’s not quite enough to do what you need to do to establish fiscal security.

You’ll need to use that money to pay your rent or mortgage, cover car maintenance, afford health insurance for your family, pay for groceries, make sure the utilities are taken care of and somehow build up an emergency fund. 

It can feel like a lot to invest for retirement on top of all that. But it’s an important thing to do because if you’re lucky, someday you’ll be old and incapable of bringing in anything close to that median income. 

Wouldn’t it be great if you could set aside money for retirement without being banned from touching it until you’re 59 ½?

You could access it in case of emergencies without paying penalties, but still be putting something aside for your future. On sunny days, that money would stay in there untouched.

But if you hit a particularly rainy period in your life, you’d be able to access that money in order to do things like pay the rent or take care of the car so you can get to work and keep bringing in that paycheck.

Roth IRAs

We’ve got such great news for you. This circumstance already exists in the form of a Roth Individual Retirement Account (IRA). When you put money into a Roth IRA, you’re putting in money that has already been taxed. Then, when you withdraw it in retirement, you won’t have to pay taxes on your contributions or the interest they have earned.

Because you’re putting in post-tax dollars, you can withdraw your contributions at any time for any reason without penalty. 

However, you can’t withdraw any interest that has been earned sans penalty until you’re 59 ½. There are a few special circumstances, but as a general rule, you’ll want to keep your interest in there at bare minimum to avoid penalties and taxes. Ideally, you’ll keep all of your contributions in there, as well, so they can keep earning interest. Because remember: While you might be able to access your money today, you will actually need some form of cash flow in retirement. Taking money out of your retirement account today is a classic case of robbing Peter to pay Paul.

But if you find yourself in bad financial circumstances, a Roth IRA allows you to save for retirement and still have full access to your money. 

How much can I save per year?

Max contributions to an IRA are $6,000 per year in 2019. If you are age 50 or older, you can contribute up to $7,000 this year. If your income is above $193,000, your max contributions will be prorated downwards. If you make more than $203,000, you cannot contribute to a Roth IRA.

How do I set one up?

Back in the day, you would have had to go to a broker to set up a retirement account, paying a financial professional to manage your assets. 

While you can still take that approach, today you have many more options. Perhaps the easiest is using a robo advisor. These advisors typically have low or no fees until your assets hit a certain dollar amount. They also have a low barrier to entry. The amount required to open a retirement account with one of these robo advisors can be as low as $25 or less. Setting up your account online is easy, and your assets are managed via an algorithm created after you fill out a questionnaire which evaluates your risk tolerance and time horizon.

There are a lot of great robo advisors on the market. Here a few to get you started on your research:

• Betterment
• Wealthsimple
• Stash
• Acorns
• Wise Banyan

What should I invest in?

Your robo advisor is likely to allocate your assets for you, but if you want to get more hands-on, here are some basics you need to know.

If you have a long time horizon—or many years until retirement—generally stocks are going to be a better investment as they have a higher potential for growth. One of the simplest and most effective ways to go about investing in stocks as an individual is to purchase them via index funds. These funds encapsulate a little bit of the entire market, automatically diversifying your investments.

However, with the potential rewards of investing in stocks comes risk. If you need to know your money will be there for you tomorrow, you may want to invest more heavily in bonds. While these investments are safer, they also commonly have a much lower rate of return. Sometimes, that rate is so low that your investment isn’t even going to keep up with inflation. 

In most situations, your ideal portfolio will include a mix of both stocks and bonds. If you’re feeling overwhelmed by all the options and decisions, remember that low-cost algorithm option available through robo advisors.

It’s your money. It’s your future.

Roth IRAs offer the best of both worlds for those who have variable incomes or are living on the cusp of a paycheck-to-paycheck lifestyle. They allow you to save for your future while simultaneously offering reassurances that if an emergency threatens your financial security, you’ll be able to easily access your contributions without penalty.