5 Reasons Teachers Need a Roth IRA

Teachers need to have supplemental retirement accounts in addition to their state retirement pension, and a Roth IRA is a good choice for teachers for several reasons.

What is an IRA?

IRA stands for Individual Retirement Account, a type of investment account designed to help individuals save for retirement. An IRA offers tax benefits to incentivize saving and helps grow your retirement savings over time.

Because an IRA is designed to help you save for retirement, you need to be prepared to leave your investments in your IRA and not make withdrawals until you reach retirement age.

There are two main types of IRAs: Traditional IRAs and Roth IRAs, and the IRS sets the contribution limits for retirement accounts.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows individuals to contribute post-tax dollars and withdraw contributions and earnings tax-free in retirement. Although contributions to a Roth IRA are not tax-deductible, qualified withdrawals are tax-free.

Why is it called a “Roth” IRA?

The Roth IRA was established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for Senator Roth, its chief legislative sponsor.

Roth IRA vs. Traditional IRA

Roth IRA income limits

To qualify for a Roth IRA, a person must have earned income and an adjusted gross income (AGI) below certain limits. Single people whose income is less than $153,000 for tax year 2023 and married couples with a combined income of less than $228,000 are eligible for a Roth IRA.

The National Education Association reports the average teacher salary in the U.S. is $66,397, which means the majority of teachers’ salaries will be within the Roth eligibility income limits.

Can you lose money with a Roth IRA?

Yes, because the investments within a Roth IRA, such as stocks, bonds, or mutual funds, can fluctuate in value, you can lose money.

However, the long-term trend of the stock market has historically been upward, and over a long investment horizon, most investments in a Roth IRA have the potential to grow in value.

Why is a Roth IRA a great investment option for teachers?

A Roth IRA is often considered a great investment option for teachers due to several benefits, including the following:

Tax-free withdrawals

Distributions from a Roth IRA, including earnings, are tax-free in retirement.

No required minimum distributions (RMDs)

Roth IRAs do not have RMDs, meaning that the account owner is not required to take distributions during their lifetime.

No income limits

Unlike Traditional IRA contributions, Roth IRA contributions are not limited by income.

No age limit for contributions

Unlike Traditional IRAs, Roth IRAs do not have an age limit for contributions, allowing individuals to continue contributing even in their 70s.

Flexibility

Roth IRAs offer more flexibility with withdrawals. For example, the funds from a Roth IRA may be withdrawn before age 59 1/2 if the account owner is disabled or for the purchase of a first home ($10,000 maximum).

Overall, a Roth IRA offers long-term tax-free growth and flexibility in retirement, making it a great investment option for most teachers.

Choose your Roth IRA provider CAREFULLY!

Understand that most of the “financial advisors” who visit schools are salespeople who earn their living from the commissions they earn on the financial products they sell.

Typically, the types of financial products teachers are offered carry high fees that will not be evident unless you are able to read through and make sense of the very confusing and very long prospectus you are given when you consider a financial product.

Additionally, many times the school or school system receives some type of compensation in exchange for allowing a company’s financial advisor to speak with its faculty.

In short, many teachers sign up for financial plans that carry hidden fees and are NOT in their best interest.

So how can you choose a Roth account provider?

How to get started with a Roth IRA

In an earlier blog post, I explained that high fees, expenses, and other hidden costs are the enemy of investors because these expenses deplete your earnings.

For this reason, you want to invest with a reputable company that offers excellent customer service as well as low fees and expenses. Fidelity and Vanguard are both companies that fit this description.

(I am not an affiliate for either company and receive no compensation for my recommendations. However, I have been a Vanguard account holder for over 25 years.)

Consider opening a Roth IRA with Fidelity

Fidelity is a financial services company that provides investment products and services to individuals, institutions, and financial advisors. Founded in 1946, Fidelity has grown into one of the largest investment companies in the world with over $3 trillion in assets under management.

Fidelity offers a wide range of investment products, including mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, and retirement accounts such as IRAs. The company is known for its strong research capabilities and investment tools that help clients make informed investment decisions.

In addition to investment products, Fidelity also offers a variety of financial planning and advisory services, including retirement planning, estate planning, and college planning. The company also provides online trading capabilities for individual investors and has a strong reputation for customer service.

Overall, Fidelity is a well-established and diversified financial services company that offers a wide range of investment products and services to meet the needs of its clients.

Fidelity’s Roth IRA page explains how you can get started.

Consider opening a Roth IRA with Vanguard

Vanguard is an investment company that provides investment products and services to individuals and institutional investors. Founded in 1975, Vanguard is known for its low-cost, passively managed index funds, which are popular among individual investors looking to build a diversified investment portfolio.

Vanguard offers a wide range of investment products, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. The company is also known for its strong reputation for customer service and commitment to investor education.

Vanguard is structured as a client-owned company, meaning that it is owned by its funds and their shareholders, not by outside investors. This unique structure helps keep costs low and enables the company to pass on the savings to its clients in the form of low fees.

Overall, Vanguard is a well-respected investment company that is known for its commitment to low-cost investing and strong customer service.

Vanguard’s Roth IRA page explains how you can get started.

What type of investments should you include in a Roth IRA?

Everyone’s situation is different, so the best investments for your Roth IRA will depend on several factors, such as your individual financial situation, risk tolerance, investment goals, and time horizon.

Some popular investment options for a Roth IRA include the following:

Index Funds

Index funds are low-cost, passively managed funds that track a broad market index, such as the S&P 500.

Exchange-Traded Funds (ETFs)

ETFs are similar to index funds, but they can be bought and sold like individual stocks.

Stocks

Owning individual company stocks can provide the potential for higher returns, but individual stocks also carry higher risk.

Real Estate Investment Trusts (REITs)

REITs allow you to invest in real estate through a portfolio of properties.

Bond Funds

Bond funds provide regular income through investment in a diversified portfolio of bonds.

You should research and consider your options carefully before making any investment decisions. Also, it’s important to remember that past performance of any investment option is not a guarantee of future results.

Why index funds are a good choice for retirement accounts

Many leaders in the financial sector recommend investing in index funds. Here are some quotes from financial experts on the benefits of index funds for retirement accounts:

“Index funds offer a low-cost, diversified way to invest in the stock market, which is a key component of most people’s retirement portfolios.” – Warren Buffett

“Index funds are a simple and effective way to invest for retirement. They provide automatic diversification, low costs, and the opportunity for long-term growth.” – John C. Bogle

“Investing in an index fund allows you to take advantage of the overall growth of the stock market, without having to pick and choose individual stocks.” – Suze Orman

“By investing in an index fund, you’ll own a piece of hundreds or even thousands of companies, reducing your reliance on any one stock and creating a more diversified portfolio.” – Dave Ramsey

“Index funds can be a great choice for retirement because they offer low fees, broad market exposure, and a simple, passive investment strategy.” – Robert Kiyosaki

Conclusion

The U.S. Securities and Exchange Commission provides K-12 educators with even more free and detailed information about saving and investing.

Before You Go…

Check out some of the other blog posts that will help you make the most of your money, including information about Flexible Savings Accounts (FSAs) and online savings accounts.

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