Thread by @Budgetdog_

Roth IRA's can make you a tax-free millionaire.

But only 6.6% of Americans own one.

Here's everything you need to know about the Roth IRA:

(and why you should have one)

What's a Roth IRA?

A Roth IRA is an "Individual Retirement Account."

Unlike a 401(k) where your employer provides it for you, you must open this account yourself.

My favorite brokers to open a Roth IRA with are:

- Fidelity
- Vanguard
- Charles Schwab

How does a Roth IRA work?

You contribute money you already paid taxes on. (Net earned income)

Then you invest the money you contributed.

A common misconception is that the Roth IRA is an investment.

Not true.

It's the account.

And you buy investments WITHIN the account.

What makes the Roth IRA special?

Two things.

- Tax-free growth

- Tax-free withdrawals

You can buy and sell stocks in a Roth IRA as you please without getting taxed.

And you can withdraw the money you made without paying taxes as well.

But there's a catch...

Roth IRA Rules:

1. There are income limits for high earners
2. Tax-free withdrawals occur after age 59 1/2
3. Annual contribution limit of $6,500 (in 2023)
4. The account must have been open for 5+ years

Let's break them down...

Rule 1: Roth IRA Income limits

2022:

Single: $144,000
Married filing jointly: $214,000

2023:

Single: $153,000
Married filing jointly: $228,000

If you make more than those amounts, you cannot contribute to a Roth IRA at all.

But there's an exception...

Exception 1: Backdoor Roth IRA

When you contribute to a Trad. IRA then convert the money to a Roth IRA.

How to do it:

- Open Trad. IRA
- Contribute money
- Don't invest money
- Convert to Roth IRA
- Invest the money

Consult a professional before attempting.

Rule 2: Tax-Free withdrawals

You can't withdraw gains tax-free until age 59 1/2.

If you withdraw gains before age 59 1/2 you will incur penalties.

But you can withdraw CONTRIBUTIONS without any penalty or taxes.

But there are exceptions...

Exception 2: Early withdrawal

You can avoid penalties (not taxes) if you withdraw for the following reasons:

- Disability/death
- Education expenses
- Birth/Adoption expenses
- Health insurance if unemployed
- Unreimbursed medical expenses
- First-time home purchase ($10k max)

Rule 3: Annual Contribution Limit

Contribution limits for 2022 are $6,000/year.

For 2023 it's $6,500/year.

But if you're age 50 or over, there's an exception...

Exception 3: Annual Contribution Limits

Individuals who are age 50 and over are allowed to contribute more money to a Roth IRA than the average person.

For 2022 you can contribute up to $7,000/year.

For 2023 you can contribute up to $7,500/year.

Rule 4: Account age

Your Roth IRA must have been opened for at least 5 years before you can withdraw from it without penalty.

This is in addition to the age requirement of 59 1/2 AND includes contributions.

But the same exceptions for Rule 2 apply to this one as well.

Should you open a Roth IRA?

A good rule of thumb is if you expect your tax bracket to be higher in the future then you should open a Roth IRA.

This way you pay taxes now (when your bracket is lower) and no taxes later (when your bracket is higher).

How to become a tax-free millionaire:

- $500/month in a Roth IRA for 31 years. (2022)
- $540/month in a Roth IRA for 30 years. (2023)
That's ~$1.1 million dollars tax-free.

I hope this helps you understand Roth IRAs on a deeper level.

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There are many people out there that would benefit from this knowledge.

Thank you for your support! 🙏

Sincerely,
Brennan