A Roth IRA is a great way to get started investing. Any money you put in is never taxed as it grows and not taxed when you withdraw it!
That’s a big deal. For example, let’s say you contribute $6,000 to a Roth IRA this year and invest it in an index fund. Let’s also say that index fund returns 10%/year and you leave it to grow for 40 years. When you go to withdraw it, that $6,000 from today will have grown to $271,556! And that’s just ONE YEAR.
Normally when you make money on an investment the government wants a piece of the action! In the above example, they would say “Ok, you started with $6K and it grew to $271K so you owe taxes on the difference, the $265K of growth”. The tax bill on $265K can be a lot (like almost $100K).
BUT if you invested inside a Roth IRA, you can withdraw it ALL (after 59.5 years old) and immediately spend it with NO TAXES WHATSOEVER. That’s a big deal.
This benefit is USE IT OR LOSE IT. If you didn’t contribute to a Roth IRA in 2020, it’s TOO LATE to go back and make use of that $6,000 limit. But don’t worry, you get another chance this year and it’s not even too late for last year! You have until tax day 2022 to make your 2021 Roth IRA contributions. You can start with any amount. For example, Fidelity offers great $0 minimum index funds for your Roth IRA.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.