What exactly is a Roth IRA?

Welcome to Wisconsin Capital Management. Today, we're going to talk about one of the most powerful tools for your financial future: the Roth IRA. If you've never heard of a Roth IRA before, don't worry. By the end of this video, you'll understand how it harnesses the 8th wonder of the world called the power of compounding, how it can benefit you, and, as a young person, why it is so valuable.

So, what exactly is a Roth IRA? In simple terms, a Roth IRA is a retirement account where you contribute money that you've already paid taxes on. This means that your money grows tax-free, and when you withdraw it in retirement, you don't pay any taxes on the growth. Imagine planting a tree today that bears fruit for you to enjoy tax-free in the future. Unlike traditional IRAs, where you pay taxes on withdrawals, a Roth IRA lets you reap the full benefits of your investments. One of the biggest benefits of a Roth IRA is the power of compounding. Albert Einstein once said, "Compound interest is the 8th wonder of the world." Let's break this down with the Rule of 72. If you invest your money and earn an average annual return of 7%, your money will double approximately every 10 years (72 divided by 7). For example, if you start with $10,000 at age 30, it could grow to $20,000 by age 40, $40,000 by age 50, $80,000 by age 60, and $160,000 by age 70. This exponential growth is the magic of compounding, and in a Roth IRA, all this growth is tax-free. By consistently contributing to your Roth IRA, you can take full advantage of compounding, turning small contributions into substantial savings over time.

You might be wondering, "Should I start a Roth IRA today, even if I'm unsure about the market's future?" The answer is a resounding yes. For example, Mark Twain famously stated, "The secret of getting ahead is getting started." The beauty of a Roth IRA is that it's designed for the long term. Market fluctuations are inevitable, but by starting early and contributing regularly, you harness the power of time and compounding. Think of it like planting a tree. The best time to plant a tree was 20 years ago. The second-best time is now. Similarly, the earlier you start your Roth IRA, the more time your money has to grow. Don't let market uncertainties deter you from securing your financial future. The consistency and time spent in the market are far more critical than trying to time the market. Another incredible benefit of a Roth IRA is that your withdrawals in retirement are tax-free. This means you can enjoy your investment returns without worrying about paying taxes.

Not only do you benefit from tax-free growth, but you also gain peace of mind knowing that the money you've saved and invested is entirely yours to use when you need it most. This can significantly impact your quality of life in retirement, providing you with the financial freedom to enjoy your golden years without the burden of taxes.

The Roth IRA is a powerful tool for your financial future. With the benefits of tax-free growth, the power of compounding, and tax-free withdrawals, it's an opportunity you don't want to miss. For 2024, you can contribute up to $6,500 if you're under 50 or $7,500 if you're over the age limit, subject to income limits for 2024. You can still benefit through a Backdoor Roth IRA if you earn more than the income limit. A common misconception is that you need a sizeable amount to start a Roth IRA, but starting one with just $50 is just as good as a large amount as further regular contributions can grow your Roth IRA over time, thanks to the power compounding. Start your Roth IRA today and let your money work for you. At Wisconsin Capital Management, we're here to help you every step of the way! Click on the link below to set one up through our premium services.

The material shown is for informational purposes only and is not accounting, legal, or tax advice. Past performance is not indicative of future performance, and all investments are subject to the risk of loss. Wisconsin Capital Management is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training. We cannot guarantee the accuracy of all the information presented. Any reference to professional credentials is not: 1) an assurance that any current or prospective client will receive a certain level of service from Wisconsin Capital Management; 2) an endorsement by or on behalf of the organization sponsoring the credential; or 3) an assertion that employees will maintain the credentials identified.