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People like the idea of having control over how their pension contributions are invested. This is the big appeal of Roth IRAs to the Irish people. But do we have anything that comes close to a Roth IRA in Ireland?
In this video, I compare how PRSA pension funds stack up against them.
This video is for informational and educational purposes only and should not be construed as financial advice.
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Further reading https://irishfinancial.ie/what-is-the-irish-equivalent-to-a-roth-ira/
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0:00
Any time I make a bit of content about Irish pensions I'm guaranteed to get this one question nearly every time
0:06
And that is whether you can invest in a Roth IRA in Ireland or is there some Irish equivalent to a Roth IRA
0:12
Generally these questions come from younger people who probably consume a lot of their finance content on the likes of YouTube
0:18
And watch huge US YouTubers like Graham Stephan, Meet Kevin and all those guys
0:23
And they talk a lot about Roth IRAs so that piques the ears of a lot of Irish investors
0:27
The main appeal of these Roth IRAs is that you can actually manage your own pension yourself
0:33
so you can choose what you want to invest your money into. And in my opinion, that is not a bad thing
0:38
If that's what it takes to get Irish people to start signing up for pensions
0:42
then they should be allowed to do it. It was reported recently that 700,000 people in the private sector
0:48
have still to take out a private pension. But hopefully this will change soon as they are bringing in an auto-enrolment
0:55
anyway the main focus of this video is to compare what the differences are between a Roth IRA in the
1:01
USA versus what you can invest in in Ireland so a PRSA and I am going to go over whether you have
1:08
the option to actually manage your own pension in Ireland similar to people in the US where you get
1:12
to choose what stocks or ETFs you want your pension to be invested into so first off let's go through
1:17
the differences between the two the Americans they have lots of different products they have 401ks They have traditional IRAs and the Roth IRAs which I just going to focus on now So when comparing a Roth IRA to a PRSA let compare all of the different attributes that they have
1:32
So first off is your contributions. For a Roth IRA in America, people when they make their contributions
1:39
that income is already taxed before they put the money into their Roth IRA
1:43
But when you put your money into a PRSA in Ireland, you will get a tax credit of 20 or 40 percent depending on how much you earn. This is probably
1:52
one of the best tax benefits of the Irish system. You can instantly get a 66 percent return on your
1:58
money because every 60 euro that you put into your pension you're going to get 100 euro benefit if
2:04
you are earning over 36 800 euro. So you would be a bit of a fool not to be availing of it. Next up
2:09
if we compare contribution limits. So for a Roth IRA people can contribute either six thousand
2:15
dollars a year or seven thousand dollars a year as a maximum depending on their age in ireland when
2:20
you are contributing to a prsa you will get tax relief on so much income depending on your age
2:26
also so for somebody who is under 30 years of age you can contribute 15 of your annual income and
2:32
get tax relief on that you can still make contributions above that amount but you just
2:36
won't get tax relief on it that increases to 20 then for people between the age of 30 and 39 and
2:42
It increases more and more as you get older. Now once you have contributed money to a Roth IRA in the US or a PRSA in Ireland both of them would allow your investments to grow tax so you don have to worry about paying any capital gains tax on those investments or any tax on any
2:58
dividend income. In terms of withdrawing money from the pension funds then for a Roth IRA Americans
3:04
they have to have invested for at least five years before they can withdraw any money out of it
3:08
they may face some penalties for doing so if it is before the age of 59 but they will not be taxed
3:14
on the growth of their contributions once they have left it in there for at least five years
3:18
In Ireland then when you're investing in a PRSA you're going to have to leave it there
3:22
until your retirement so probably 60 years of age at the earliest unless you become very unwell
3:27
and you cannot work anymore in that case you may be able to withdraw it early. Another difference
3:32
between both of them is a Roth IRA in the US cannot take any employer's pension contributions
3:38
but a PRSA in Ireland can. So they are the key differences when it comes to taxation of both of
3:43
them but probably what the main appeal as I was saying earlier on is of a Roth IRA in the US is
3:48
that you can actually manage your own investments so now let's actually talk about whether you can
3:52
do that in Ireland with your PRSA also. Most PRSAs that people invest in in Ireland they don't
3:58
actually have control of what they are investing in. If you have a pension with the likes of Irish
4:03
Life what will happen is when you set up the pension they will ask you what your risk profile
4:07
is and if you say you are a risk taker then maybe they put more of your money heavily weighted into stocks rather than bonds and that about as much control as you will have But there are options out there for Irish investors if they do want to actually control their own investments One of the most popular ones is what Davy offer Davy Select have their own trading platform so
4:28
they are perfectly set up to support this type of product. In order to set up one of these accounts
4:33
you will actually need to call them and fill out application forms and everything like that
4:37
to set one up. The account that you can set up with them will depend on whether you were already
4:41
part of a company pension scheme or not. If you are like me who was already paying into a company
4:46
pension scheme then they will allow you to set up a PRSA AVC. So AVC stands for additional
4:53
voluntary contributions. So if I wanted to make an additional contribution to my pension at the end
4:59
of the year, make a lump sum investment on top of what I'm already doing with my company, then I will
5:03
be able to do it through Davy Select and control exactly what it is invested in. I'm in the process
5:08
myself of setting up one of these accounts I'll probably do a video on it in the next week or two
5:13
when I have it all set up and I'll show you how it actually works and what it looks like. I know
5:16
some people will also probably have a problem with taking out a pension with Davey especially with
5:21
kind of what's happened with them in the last few years and what they've been in the news for but
5:24
when it comes to self-directed and self-managed pensions in Ireland we don't really have a lot
5:28
of choice. So that is pretty much it for my video today I hope you are not more confused now than
5:33
you were at the start if you did enjoy the video and found it useful please make sure to drop a
5:37
like on it and subscribe to the channel and hopefully I'll have that video up on the Davies
5:41
Select account within the next few weeks so we can check that out as well
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