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What’s a Roth IRA And How To Manage It?

Withdrawal of funds from Roth IRA at retirement is absolutely tax-free.
Cover Image Source: Pexels | Photo by Karolina Grabowska
Cover Image Source: Pexels | Photo by Karolina Grabowska

Experts believe that a Roth IRA is one of the best retirement plans out there. People can easily invest money on an after-tax basis and then withdraw their funds at retirement, absolutely tax-free. Further, they can even grow their money by actively trading and investing, making more out of the account apart from decades of compounding growth. This is all tax-free! Here’s all you need to know about how to manage and grow your money with a Roth IRA account.

OVERALL PATTERN $ $ A DOLLAR DOLLARS SIGNS | Getty Images | Photo by H. Armstrong Roberts
Getty Images | Photo by H. Armstrong Roberts

A Roth IRA is an individual retirement account where people can contribute their after-tax income and enjoy tax-free growth and withdrawals. Withdrawals can be made at the age of 59 ½, after having held the Roth IRA for at least five years. People can choose an institution to open a Roth IRA account and even actively trade with it.

IRAs have annual contribution limits and in 2023, account holders can contribute up to $6,500, with an additional $1,000 catch-up contribution for people 50 years old or above. Further, if a person earns $153,000 or more as a single filer or $228,000 or more as married filing jointly, they are no longer eligible to contribute to a Roth IRA for 2023 as per Bankrate. Money contributed to a Roth IRA could come from employment income, or a rollover from a Roth 401(k) plan.

In a Roth IRA account, people are allowed to make nearly any investment permitted in a regular brokerage account as well. They can choose from stocks, bonds, mutual funds, ETFs, real estate investment trusts (REITs), commodities and more.

While some investors may be concerned about actively trading in a Roth IRA, there is no rule barring people from doing so, as per Bankrate. However, there would be some extra fees for certain types of investments. For example, mutual fund companies may charge an early redemption fee. Usually, this fee is applied if the account holder has owned the fund for less than 30 days.

Representative image of a trader monitoring offers in the Standard & Poor's 500 stock index options | Getty Images | Photo by Scott Olson
Getty Images | Photo by Scott Olson

However, research shows that passive investing is better than active investing. As per Bankrate, a 2023 study from S&P Dow Jones Indices revealed that about half a percent of fund managers underperformed their benchmark. These were professionals with analysts and high-powered tools trained to beat the market. Thus, beating the interest rate gains of a Roth IRA by actively trading could be a mammoth task for common people. Further, beating the market requires a lot of research and time.

Since an IRA is meant to fund the account holder’s retirement, it is better not to speculate on investments. Some people can’t afford to lose it as they need this money to be there in the latter part of their life. However, if the option to actively invest is exercised, a long-term buy-and-hold strategy should be employed to make the safer bets. Further, low-cost index funds may be the right choice. This strategy allows the user to grow their money without much effort as these funds don’t cost a lot to manage.

Representative images of two elderly women | Getty Images | Photo by Sean Gallup
Getty Images | Photo by Sean Gallup

Roth IRA provides investors the benefit of avoiding taxes on investments legally. Any taxes on dividends, interest, capital gains, and other investment earnings are gains are not applied if the account holders abide by the rules.