RothIRA – you want one. Allow us to tell you why.

There are tons of stocks and mutual funds and other things to invest in. The type of account we do it from matters. Not only does each transaction carry a possible fee (adding to our costs) but also for the taxes we pay. A regular trading account is taxable. The company that houses the account (Scottrade, eTrade, etc) will report to the IRS the money that you have made in this account. Yup, even here The Man has his hand out. They will also send you a form to include when you file your taxes. In a regular account you will be taxed on any winnings you took for the year.

Few people have heard of a RothIRA and most do not know that it is tax free. This is not a regular account from where we take profits whenever we want. There are rules to follow in order to keep the tax-free status. These rules are not bad at all if the investments we put in there are meant for retirement or for the long term. Basically, whatever your account is worth when you reach retirement age is tax free.

Most people have heard of a 401k – this is a retirement account managed by someone else. When you retire you can withdraw it, pay taxes on it and ride into the sunset with the rest. A RothIRA is similar, except that you manage it yourself and when you reach retirement, your genius investments and all of their profits are all yours – no taxes. This is meant for us regular folks to get a leg up – its an opportunity! Rich people can’t participate and the amount us regular folks can invest is currently limited to $5,500 a year. So if you can save $458 a month, put it in a RothIRA, invest it in dividend-yielding stocks or mutual funds and reinvest those dividends right back (to produce even more dividends, and on and on), you can do very well for yourself.

This is called a “Dripping” which comes from DRIP (Dividend Reinvestment Programs), an investment program that corporations would offer people to buy their stock and conveniently reinvest dividends into more of the same stock without the transaction fees a broker would charge. We can drip by ourselves with whatever dividend-producing stock or mutual fund we choose. Some brokerage accounts allow you to setup a drip automatically free of charge. Think about it, you picked a stock that you will buy more of over time and every once in a while you get more of it for free. Those free stocks will produce more free stock that will produce more free stock! Free! Free! Free!

Dripping in a tax-free RothIRA is a powerful investment strategy. Here is an example: assuming you open a RothIRA account with $5,000 and invest $458 a month in stocks (or mutual funds or whatever you like) that grow 4% annually on average, while yielding a 4% dividend on average along the way for 30 years, you will accumulate over $672,000. Those $458 every month for 30 years is almost $165,000 if all you did was put it in the bank (or stuff it in your mattress). But invested in a RothIRA with a dividend reinvestment strategy can be much more valuable – enough to retire on.

Interestingly enough, there are qualifying life events that can allow you to withdraw before retirement age without paying taxes or penalties. These include, first home purchase and paying your child’s college education. More reasons to open a RothIRA.

Investing in a RothIRA with a dripping strategy is like free money. A Money Rebel likes free money.