Here's What This Money Expert Would Put in a Brand-New Roth IRA -- Should You?
Humphrey Yang is a well-known influencer who regularly shares personal finance expertise with his followers. The former financial adviser recently explained to his 3.4 million TikTok followers how he would invest in a Roth IRA if starting from scratch.
Roth IRAs are a powerful vehicle for growing money tax-free. During retirement, withdrawals are also tax-free. While there are contribution limits, the Roth IRA remains an important investment tool for retirement.
Read More: Rachel Cruze: 7 Easy Ways To Manage Money So You Can Grow Your Wealth
Find Out: 5 Signs You’re Losing Money Every Month — and How To Find the Leaks
Here’s what Humphrey Yang said he would put in a brand-new Roth IRA.
Invest in Exchange-Traded Funds (ETFs)
According to Yang, younger investors can afford more risk and might split their portfolio with 50% in ETFs and 50% in five to 10 individual stocks that may be more speculative.
As reported by Fidelity, ETFs — or exchange-traded funds — are generally organized around a strategy, such as tracking a specific sector or market index like the S&P 500. ETFs are typically less risky than individual stocks since their performance is not based on a single company.
For older investors who may be more risk-averse, Yang explained that their portfolio may be more heavily made up of ETFs, even consisting of 100% exchange-traded funds. As noted in the TikTok video, ETFs are less volatile and offer more consistent growth — two factors that are favorable for investors who may have less time to recover from losses.
Consider Contribution Limits
Investors under age 50 can contribute up to $7,500 per year, as noted by Yang. Investors age 50 and older can contribute up to $8,600 per year.
Roth IRA contributions are made with after-tax dollars, meaning that money grows tax-free and withdrawals are tax-free after age 59½. There are also income limit considerations, which may make the Roth IRA unsuitable for some investors. To make the full contribution, someone who is single or head of household must earn less than $153,000. People who are married and filing jointly must earn less than $242,000 to contribute the full amount. Partial contributions are available for some high-income earners.
While many people only contribute to a Roth IRA once a year, some experts recommend a more nuanced approach. They suggest following a dollar-cost averaging strategy. This approach avoids timing the market, since individuals invest money evenly over the course of 12 months. It also allows investors to potentially earn returns throughout the year.
Maxing Out the Roth IRA
Yang noted to his millions of followers that if they are able to max out contributions to their Roth IRA and earn an 8% return, they would have $108,649 after 10 years. After 20 years, investors would have $343,215, and after 30 years, they would accumulate $849,624.
After 40 years, investors who have maxed out their Roth IRA and earned an 8% return would have an estimated $1,942,924 for retirement. As long as individuals withdraw funds after age 59½, those withdrawals are tax-free and penalty-free, as explained by the content creator.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion:
