3 Simple Reasons why you should open your Roth IRA today - all it takes is $1
Written By: Nick Nguyen | Read full profile
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If you’re 18 years old and have $1, it’s time. The biggest investment you can make for yourself is the Roth IRA. All you need is a phone, tablet, or computer with access to the internet and you can get started - yes, it’s that easy!
When I was 18, I came across this investment vehicle, but was too naïve to get started. There were way too many factors to think about like which brokerage to choose? How much do commissions cost? What was I going to invest in? What if I lose all my money, etc. Because I didn’t do my research back then, these types of questions always put me in an analysis paralysis state. So I put together this short post, to give you 3 reasons why you shouldn’t wait and to just go open your Roth IRA now**.
**You can only invest in a Roth IRA if you are currently employed and earning an income, and you cannot invest more than the yearly contribution limit or how much after-tax income you make for that year. For example, for 2019, you could contribute up $6,000 to your Roth. But if you only made $3,000 from your job, you can’t magically take another $3,000 from someone else and contribute it to your Roth.
Reason #1
There are no longer any commission fees and minimums.
Back in 2013, it cost anywhere from $2.95 to $7.95 to buy a stock, commission, ETF, etc. That was crazy! If I picked the wrong stock (I was young and didn’t know about index funds yet), I could essentially lose all my money on the one trade. Well in 2013, Robinhood rocked the world by rolling out commission free trades, and it wasn’t until 2020 that all the big companies - Charles Schwab, Fidelity, Vanguard, JP Morgan Chase, Merrill Lynch - Bank of America, E*trade, etc. rolled out a $0* commission fee! Many of these brokerages now also have done away with their minimums (with the exception of Vanguard, which has different minimum requirements for their funds). This means that if you want to open your Roth IRA today with $1, you can just put it into a total market or S&P 500 index fund without having to worry!
*Note there are certain exceptions to their $0 fee where you still have to pay for option contracts, buying ETFs/Index Funds managed from other brokerages, etc.
Reason #2
It’s a super savings account!
What a lot of people don’t know is that since you are depositing your after-taxed dollars, you are free to withdraw your contributions at any time without paying the 10% penalty. What this means is that whatever you put in, you can take out, BUT whatever you gained (from interests or trading) must stay in. The beauty of index funds is that you can literally buy them for $1. Some brokerages now like Fidelity will even let you buy fractional shares, so you could buy $1 of an ETF or stock of your choice! If you want to learn more about simple investing, a great book I recommend is The Simple Path to Wealth by JL Collins. This guy is a titan in the field of simple investing using index funds and his book explains the psychology and exact thought process you should have to make your life less complicated when it comes to picking stocks. And, if you don’t want to put your money into a fund or a stock, just leave it in your FDIC-insured core account where it can earn anywhere from 0.20% to 1.51% interest (make sure you check the fact sheets for those core funds).
Reason #3
Your Roth IRA has a ‘Holding’ Period before you can take out gains for approved purchases.
Whether you’re 59 ½ or 18, there is a 5-year holding period to which you need to wait before you can withdraw your earnings from your Roth IRA without having to pay any taxes or penalties. Remember, the whole point of having a Roth IRA was so that your money could grow tax free over time. But now you’re probably like, ‘Nick, who cares? I’m not thinking about retirement now! I’m only 18!’ Well, what happens if you got really lucky and put money into an S&P 500 or Total Market Index Fund in 2018 and saw 31% growth in 2019 and then decided, ‘I’m going to buy a house because the interest rates started to go down!’ If your account has been open for 5 years, you’re able to take out up to $10,000 for your first home purchase without any taxes or penalties! There are actually quite a few ‘qualified’ distribution scenarios if you’re under the age of 59 and have held your Roth for 5 years:
First-time home purchase.
Qualified education expenses.
Qualified expenses related to a birth or adoptions.
You get disabled or pass away.
Paying for unreimbursed medical expenses if you’re unemployed.
You can read more about this on Investopedia or any brokerage’s site like Charles Schwab. (These were the two biggest sources for my information.) But for more specifics, please consult an accountant, tax professional, or financial planner.
So why hasn’t anyone ever told you these secrets? Well 2020 is a revolutionary year for the YFFIEs. Brokerages have evolved substantially with technology to make it more convenient to open and manage these accounts. With the unprecedented events that are transpiring in the first quarter of 2020, now’s a great time to open one up and start buying stuff while it’s all on sale!
If you’d like to know more about which brokerage to go with, please feel free to check out my other posts where I talk about their pros & cons and finding the right one for you!
*Nguyening Lifestyles is not a registered financial service provider and does not give financial advice. All information in these posts are for entertainment purposes only. Nguyening Lifestyles is not liable for any actions or outcomes that transpired after your reading of the following post.
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