1. What’s the most common mistake people make when opening a Roth IRA?
The most common mistake I see is people opening Roth IRA accounts without qualifying due to the higher modified adjusted gross income limits. Be sure to check the income limits before opening the account. This is a good reason to work with a financial advisor when doing so.
2. What should people know about funding vs. actually investing the money?
Opening the account is only the beginning. Making sure it is properly invested is a vital next step. The Rule of 72 will inform the investor of the long-term results of investing. For example, $7,000 invested at age 21 at 3% would be worth approximately $25,700 at age 65, whereas at 10%, it would be worth approximately $463,848. The only different factor in this equation is the rate of return. Do you think this is worth getting right?
3. Are there age-related or income-based traps people fall into?
One rule that is overlooked is that a Roth IRA must be funded for five years to benefit from tax-free growth. This is also a consideration when doing Roth conversions. I recommend you visit a good financial advisor for guidance.
4. How can new investors ensure they’re optimizing their Roth IRA from the start?
In order to optimize your Roth, you need to know contribution limits and, when possible, make maximum contributions. Then, obviously, have it properly invested.
5. What advice do you wish more Roth IRA users heard early on?
I wish more people would realize it would save them from potential tax issues during retirement. Again, if an investor put even $7,000 a year into a Roth IRA from age 21 through age 65 and averaged 10%, it would result in approximately $5,000,000.
Then, as income is taken from this account, it is tax-free forever and passes on to your heirs tax-free as well. There are also more reasons, including potential IRMAA issues and a potentially huge tax burden on non-spousal heirs. I recommend planning around this issue and that you be sure to do what is best for your future and the future of those you love.