20 years old, Roth IRAs how they work

Question

I am 20 years old, I make around $30K a year, this is just an entry job so I hope to be making more in a few years. I was researching Roth IRA's and I was just a little curious how they work, and if it would be a smart decision to get one? I currently have $6K in my savings account that is seperate from my emergency funds/normal accounts.

My career passion doesn't exactly pay the big bucks, I would say I could get up to $50K yearly in 5 years or so. Which is why I would like to do what I can at my current age to make my financial situation firm when I have a family in the future.

I guess my question is how does a Roth IRA work exactly? From what I read I gather that I could put up to $5500 into an Roth IRA? Is that the max I can contribute? Or is it a yearly thing? I could be way off, any advice or sources you can point me to would be greatly appreciated.

Answer 1

From what I read I gather that I could put up to $5500 into an Roth IRA? Is that the max I can contribute? Or is it a yearly thing?

Yearly.

You can make the maximum contribution every year until you start taking distributions (withdrawals).

Roth IRA contributions are not tax deductible, so they won't affect your current taxes. Distributions from Roth IRAs are not taxable though. This gives some advantages to Roth IRAs. First, your future tax rate may be higher than your current tax rate. Second, the investment returns can accrue without taxation. A final advantage is related but not derived from that: you can effectively contribute more to a Roth IRA than you can to a traditional IRA, as you contribute after the taxes.

The contribution limit per year to IRAs is currently $5500. Assume a maximum contribution that increases sixteenfold to $88,000. With a Roth, you can withdraw the entire balance through the regular distributions. With a traditional IRA, you'd pay taxes out of the balance first. So you'd have less money. Of course, this doesn't matter unless you're making at least close to the maximum contribution.

IRS collection of IRA FAQs.