Opening my Roth IRA: What is a Roth IRA?

About a week ago, I decided it was time to open a Roth IRA. For context, I am a 22-year-old who graduated college in May 2020. My full-time employment has been delayed until January 2021. I have been filling my time with various side hustles and have actually started to make some money. I’ve decided that the postponement of my employment should not preclude me from starting to invest for retirement.

Luckily, in the U.S., there is a way to invest for retirement even if you are not working for an employer that offers a retirement plan! This is called the Individual Retirement Account (IRA).

IRA Basics

Essentially an IRA allows you, as an individual, to open a retirement account on your own and contribute money to it while still getting tax-benefits (i.e. save money one taxes).

There are two types Roth and Traditional. This is where a lot of people get all nervous and start to sweat because they don’t know the difference, or which one is “better”. I’m going to break it down for you real easy here.

Roth IRA: Pay income tax on the money you put into the account now. Take out the money tax free later.

Traditional IRA: Pay no tax on the money you put in now. Pay income tax on the money you take out later.

Note: if you put in after-tax money into a traditional IRA, the IRS will send you money back via your tax refund.

I’m not going to get into the specifics of the pros and cons of a Traditional vs Roth IRA because frankly they’re tedious and not super consequential. Most people end up picking the Roth IRA for one reason or another, but I’ll let you make that decision yourself based on your own research.

The biggest decision here is whether you are going to open any IRA or not.

Reasons that I want to open an IRA:

1. The longer I stay out of the market (meaning not invested), the more I’ll lose in potential gains. When you start investing, your money immediately starts growing or shrinking depending on how the market is doing. Since, on average, the market tends to grow over the long-term, I will increase my chances of earning a higher return by the time I retire if I decide to start earlier.

2. Even though I’m technically unemployed, I am in the right financial situation to feel comfortable putting my money in riskier and longer-term assets. I am currently living at home and incurring virtually no expenses. I have a pretty hefty emergency fund given the fact that I had been saving for my post-grad Europe trip for years and was unable to take it, thus that money has translated into a good amount of savings. I have no debt that I need to worry about paying off.

3. If I would have started my job in September, I would have been contributing to my 401k five months earlier than I will eventually be able to. My goal is to track the contributions I would have been making.   

4. I am earning income from my side hustles that I want to make work for me long term. I don’t want to use this money for unnecessary consumption.

5. An IRA is an amazing investment vehicle that I will have full control over. I will be able to pick which brokerage to use and which investments to put my money into. This will be a great opportunity for me to dip my toes in investing and learn.

Next Steps

My plan is to deposit all my side income from now until January into my IRA until I reach the maximum amount of $6000. I will take you all along the journey of setting up my IRA and sharing my decisions including picking a broker and choosing my investments.

Once I start working full-time, I will also share with you what I decide to do with my IRA and how I incorporate it into my complete investment portfolio.

Please leave comments of any questions you have down below or head over to Instagram @twocentswithjulia to DM me your questions!