TikTok is hit or miss for accurate advice on finance topics. Although the “#finance” hashtag has amassed over 989 million views, there is just as much bad advice as there is good. But one user shared a tip that went viral after she revealed a common investing mistake that she had fallen prey to.
“I invested in a Roth IRA for over two years, every single month, and it took me dating someone in finance to realize that I had never invested anything,” she said in the clip. “I had just deposited money. I never bought a single stock.”
The clip received about two million views with comments flooding in from others who had made the same mistake. So how does this happen? What are the consequences and how can you avoid the same mistake? Let’s discuss.
To avoid simple, yet costly mistakes such as this, seek out a financial advisor that can help you cover all of your bases regarding your retirement and investments.
What is a Roth IRA?
A Roth IRA is an investment vehicle used commonly by young investors for their future retirement savings. With this particular type of individual retirement account, you contributing after-tax dollars to do the initial funding, and since you already paid taxes upfront, there are no income taxes when you withdraw in retirement.
So even though you don’t receive a tax break initially, the money you save on taxes after you retire is where you see the benefit. Put another way, you pay taxes on the seeds, not the crop.
There are some other benefits to the Roth IRA:
Pros:
Compounded investing and growth
Allowed early withdrawal for qualifying life events (buying a home, education, etc.)
Withdrawals at 59.5 with no tax penalty
Of course, there are some drawbacks:
Cons:
General early withdrawal results in a 10% penalty
Holding a Roth IRA for less than 5 years results in income taxes
Roth IRAs have an income cap
A Common Mistake With Roth IRAs
Possessing a Roth IRA is generally a great sign that an investor is committed to his financial security after he retires. But even good intentions can yield poor results without the proper actions. In the TikTok case, the user opened a Roth IRA and put money in without selecting any stocks to invest in. This is known as making a contribution but failing to invest, basically using it as a bank account with no interest earning on the deposit.
While seasoned investors may agree that this is a rookie mistake, it’s one that does happen more often than you would assume. This is yet another reason why financial literacy is important and necessary. Even implementing the basic knowledge of opening a retirement account can fall on deaf ears if a deeper understanding of how your money grows and compounds is not known.
The result– potential years of contributions with no investing gains.
How to Use A Roth IRA Properly
One of the reasons Roth IRAs remain a popular form of investing is that they are generally easy to understand, open and fund. No matter where you choose to open your IRA the basics of the process are about the same:
Choose a financial institution to open a Roth IRA: Finding a place to house your Roth IRA can be as simple as a Google search. It is truly a personal preference, but you do what a provider with low fees, great customer service, FDIC insurance, and an easy-to-use platform that makes contributing as hands-off as possible. Roth IRAs are commonly a “set-it-and-forget-it” investment tool, but there are options where you can be more hands-on if you choose. Explore the best Roth IRAs.
Open and fund your Roth IRA: Typically, this can be done solely online, but some institutions may require a face-to-face visit. This is another reason why you want to select a provider with an intuitive website and platform. Having to hunt for what you need is an added frustration to avoid. From here, you should be able to follow the prompts, attach an external account and fund your account through ACH transfers.
Choose your investments: Step three is why we’re here. If a Roth IRA is a “savings vehicle” then investing is the gas to fuel it. Without investing, your money isn’t working for you, just sitting idle and being eaten by inflation and/or fees. Your investment selection is another personal preference and can include target-date funds, index funds, ETFs or individual stocks.
Feeling lost on this step? We highly recommend speaking with a professional to get you started. They can help you set up an investment strategy that works for your financial goals.
4. Continue contributing: Check to see if your institution requires minimum monthly contributions. Regardless, your investment will go much further if you continue making contributions regularly over time. As we mentioned above, there is a contribution limit of $6,000 per year for those under 50 and $7,000 for anyone 50 and older.
Bottom Line
A Roth IRA can be a great accessory to supplement your retirement savings toolkit. Other popular investing drivers include tax-deferred accounts like 401(k)s and traditional IRAs. Whichever you choose, just take the time to double-check that you’re actually investing and putting your contributions to work. Don’t make the same mistake the made a user go viral on TikTok.
Tips for Your Retirement Savings
Financial advisors specialize in helping clients invest for retirement, which makes them great partners for anyone looking to boost their retirement savings. Luckily, finding a local financial advisor doesn’t have to be hard. SmartAsset’s free tool can match you with up to three advisors in your area. Get started now.
Roth IRAs earn the most if you start young and add to them consistently for decades. But if you already have a retirement account, you can convert your money to a Roth IRA.
If you’re managing your own investments, it’s important to have a succinct plan in place for where your assets will go. Try using SmartAsset’s asset allocation calculator to figure out a plan that fits your risk profile.
Photo credit: ©iStock.com/jygallery, Photo credit: ©iStock.com/Andrii Dodonov
The post TikTok Exposed a Major Mistake You May be Making in Your Roth IRA appeared first on SmartAsset Blog.
Tax planning for your retirement accounts is an important part of setting your beneficiaries up to maximize the benefit of what you leave behind after you die. If you have a Roth IRA, you can effectively avoid estate tax issues … Continue reading → The post Guide to Roth IRAs and Estate Taxes appeared first on SmartAsset Blog.
529 plans are for education, and Roth IRAs are for retirement. But you can use either—or both—of these tax-advantaged plans to boost college savings.
Traditional, tax-deferred retirement accounts, like 401(k)s and traditional IRAs, give you a nice tax break up front, but then you have to pay taxes on your withdrawals in retirement. Fortunately, if you don't want to deal with that, you can move your savings to a Roth account later on. Once you convert your tax-deferred retirement savings to Roth retirement savings, there's no turning back.
States vary widely in the way they tax retirement income so location is an important consideration in financially planning for retirement. Some states don't levy income states on any sort of retirement income, while others tax IRA and 401(k) distributions, … Continue reading → The post 11 States That Do Not Tax Retirement Income appeared first on SmartAsset Blog.
Certain retirement purchases, like big houses and expensive boats, are often regretted by retirees. However, there are other purchases that act more as investments. Here are eight purchases every…
For decades, Americans have used credit cards to fund their purchases today, while paying for them later. However, the millennial generation is changing those rules, oftentimes preferring to use cash,…
Just three of Gregg Berhalter’s roster for Qatar have Latino roots. But many inside the game believe the coach should be given the benefit of the doubt
NASA tapped SpaceX to provide a second crewed demonstration landing on the moon as part of its Artemis lunar exploration program, a huge win for SpaceX and a possible gesture at improving the relative lack of existing competition for such services. The award is a modification to an existing Human Landing System (HLS) contract between the two entities, which established the agreement for the first lunar demonstration landing.
According to an annual survey from the AFBF (America's Farm Bureau Federation), the cost of a typical Thanksgiving feast for ten people will cost $64.05 dollars, or a little less than $6.50 per a person.
Investing in the stock market can be daunting during periods of volatility, but it's a fantastic time to buy as we head into 2023. Stock prices are down across the board, which means now is your chance to load up on quality investments for a fraction of the price. While nobody can say for certain how the market will perform in 2023, there's one ETF I'm loading up on heading into next year: the Vanguard Growth ETF (NYSEMKT: VUG).
"Jeopardy!" champion Amy Schneider testified before an Ohio House of Representatives committee meeting Wednesday against a bill that would restrict gender-affir
San Francisco Federal Reserve Bank President Mary Daly on Wednesday said the U.S. central bank's policy rate could end up in the 4.75%-5.25% range, high enough to squeeze inflation from the economy but not so high as to trigger a severe recession. "We are … tightening into a strong economy, and I'm still optimistic we can bring this down so that Americans don't feel we've solved one bad problem and put them in a much worse one," Daly said in a CNBC interview. The unemployment rate, now at 3.7%, could rise to 4.5%-5% and while it could take longer to find work, there would still be jobs available, she said.
Despite market turbulence that ate into retirement account balances and left workers feeling worse about their finances, the majority of retirement savers kept their contributions steady and Generation Z savers actually hiked their contribution rates, new data from Fidelity Investments showed. Although average account balances have decreased, the data suggested retirement savers continued to focus on the long-term: total 401(k) savings rates held strong, the number of IRAs at Fidelity continued to increase, and the percentage of employees with 401(k) loans remained low for a sixth consecutive quarter, the firm found.
The Oracle of Omaha knows how to beat inflation. So ride his coattails.
The Senate on Wednesday held a key test vote on the Respect for Marriage Act, which would protect same-sex and interracial marriage. ABC News’ Jay O’Brien reports.
The first Earth view from NASA's moon-bound spacecraft has been shared after Orion spacecraft about ten hours in flight.
There is possibly an endless list of things you shouldn't do with your money. But from bad habits to decisions based on wishful thinking, some of the bigger missteps can really cost you….
At a G-20 meeting, a $20 billion funding plan was announced aimed at helping Indonesia, the world's largest coal exporter, adopt renewable energy sources. Developed countries, including the U.S. and some big banks, have backed the plan as part of efforts to help emerging economies decarbonize. Analysts say $20 billion would be a start. Shifting Indonesia's economy away from fossil fuels would require energy-sector investments of at least $2 trillion by 2050, according to a recent report by Bloom
Donald Trump’s presidential announcement Tuesday included the usual rhetorical targets of China, the news media, and President Joe Biden.
Two children were arrested and charged with stealing a man’s car on Saturday, according to the Memphis Police Department (MPD).