Smart Money Moves for Parents

It’s overwhelming to invest your money––especially when you don’t know your options. Learn about what a Roth IRA is and how it differs from other investment options so you can build wealth to help secure your family’s future.

What Is a Roth IRA?

“IRA” stands for “individual retirement account.” “Roth” comes from the name of the late Senator William Roth who helped create the Roth IRA. “Roth IRA is an umbrella term,” Jonathan Millican, a financial advisor at Savant Wealth Management in Birmingham, explains. “I could spend all day telling you the different accounts you can use to open a Roth IRA account: VanGuard, Charles Schwab, a local bank…” Once you decide where to invest your money, you then must decide how you want to invest it, often in stocks, bonds, or mutual funds. Depending on your financial situation, you can be conservative or aggressive with your investments, and your interest rates will vary accordingly. Regardless of how you invest, Millican stresses that it is better to invest a small amount of money early than wait. Because of the time-value of money, the earlier you invest, the bigger the benefit in the long-run—particularly when it comes to factors such as compound interest.

According to Millican, there are two facts and two rules that every parent needs to know when it comes to Roth IRAs:

Fact 1: Roth IRAs are Relatively New

Roth IRAs are relatively new in the world of retirement accounts. In fact, they weren’t created until the late ’90s. While the history of the Roth IRA may not seem important, it matters because most people under the age of 50 did not have parents who contributed to a Roth IRA account. Thus, they must navigate this new type of retirement planning on their own.

Fact 2: The Difference Between a Traditional IRA Account and a Roth IRA Account

A “traditional” IRA is, as Millican puts it, a “pay later” type of account: You receive tax benefits in the here and now as you put money into the account and allow it to grow over time. Then, when you take money out, you pay income tax on the total amount inside the account. A Roth IRA, however, employs the “pay now, not later” strategy: Since you already paid taxes on the money before investing it, there will be no tax deduction when you withdraw the money—ideally decades later.

A traditional 401K account is similar to a traditional IRA, but it is tied to an employer and allows employees to contribute a portion of their earnings into a retirement savings plan. Sometimes 401K benefits also include an employer “matching” the money invested by the employee each year. A Roth 401K is very similar to a Roth IRA, but it, too, is an account connected to or sponsored by an employer.

Key Benefits of a Roth IRA:

Part of the benefit to a Roth IRA, Millican explains, is that younger people are often at a lower tax rate now than they will be when they retire, so if they wait, they will likely pay income tax on their money at a higher rate. Another one of the Roth IRA’s primary advantages is the option to take out money prior to retirement penalty-free, unlike when withdrawing from a traditional IRA or 401K. While Millican suggests caution in withdrawing from your retirement savings, he acknowledges it is easier to pull from the Roth IRA than a Roth 401K.

Rule 1: Yearly Limit to Investing

For 2024 and 2025, the maximum amount you can contribute to a Roth IRA is $7,000 per person each year. (You can still add money to your Roth designated for “2024” until April’s tax date.) If you are over the age of 50, you can invest $8,000 each year. For those who are working part-time, however, you cannot put more into the account than you earned that year. It is worth noting that you can contribute more per year to a 401K account, but you must weigh this consideration against the other advantages of a Roth IRA before you decide which works better for your family.

Rule 2: Limit on Earnings

Another limitation of the Roth IRA is that in order to invest money into the account, you must not make above the maximum earning requirement. For single parents, you must make under $150,000. For those filing jointly, your earnings cannot exceed $230,000. If you are not eligible for a Roth IRA, you can still invest in a traditional IRA or a 401K.

How Does a Roth IRA Fits into a Family’s Financial Plan?

There are many ways that you as a parent can invest your money. A need that often feels the most pressing is to save for your children’s education using a 529 College Savings Plan or something similar. Jonathan Millican’s advice is to make your number one priority an emergency fund. An emergency fund is 3–6 months of normal living expenses saved and set aside, not tied up in investments, that you can pull from in case of a job loss, disability, or other emergency.

After you have your emergency fund established, he encourages saving for retirement and education. “The ratio varies for each family,” he says. Millican warns against being “retirement poor,” or saving so much for your kids’ education that you forget to save for your retirement. “You can borrow money for college, but not for retirement,” he jokes. His biggest tip is figuring out what is important to you and your family and what you want to accomplish with your investments.

One of the best ways to evaluate where you are and where you want to be financially is by creating a spending plan to discover how much money you are bringing in and how you are spending it. If you cannot put it on paper, it will be even harder to do in “real life.” He encourages parents to use online resources, apps, and even consider consulting a financial advisor to determine their fixed and flexible expenses and what levers they need to pull to increase savings—whether that be decreasing spending or looking for a new job with a higher pay.