Retirement
ByPhilip Taylor, CPA
I reallylove the Roth IRA.
There are so many reasons tostart one of these bad boys and getgoing with your retirement savings.
Today I thought I’d do a little convincing and list some of the reasons tostart a Roth IRA. So check these out and then get started.
Seriously. No excuses.
1. You’ll Be More Prepared for Retirement
The Roth IRA was created to provide incentive for you to save for your own retirement. Use it. Retirement will be a big chunk of your life. Do you want to be relying on someone else to fund your trips to see your Grand kids or your golf course green fees (or fill in the blank with what you want to do)??
2. Pay Less in Taxes
The Roth IRA was created as a result of the Taxpayer Relief Act of 1997. This account allows you put in after-tax dollars, and never pay taxes again on those funds, AND never pay taxes on the earnings from those funds. If you used a regular savings account, CD, or taxable investing account for retirement savings, you’d have to pay taxes on your earnings. With a Roth IRA you can avoid all of that.
3. Tax Diversification
Odds are you already have a 401K or Traditional IRA. Those accounts use pre-tax dollars and then tax you when you retire. The Roth IRA is just the opposite. It uses after-tax dollars and then you never have to pay taxes on those funds again, or the earning you’ll receive from those funds. So by having both a 401K and a Roth IRA you hedge your bets against the future of taxation in the U.S.
4. More Control Over Investment Options
With a Roth IRA you have a broad range of investment options. Unlike your 401(k), you’re not restricted to a limited number of funds you can invest in by opening a Roth IRA. This is great because you can go out and find funds with lower expense ratios. Which will allow your retirement savings to grow even faster.
5. Because You’re Young
Young people have two big advantages with a Roth IRA: the power of compounding and a low income. For instance, if you’re in your 20s, you have around40 years until you’re ableretire. That’s 40 years that your money has to grow and compound on itself. Also, since you have a low income now, you’re more likely to fall under the Roth IRA income limits. High income earners aren’t able to contribute to a Roth IRA. Invest in a Roth IRA while you still can.
6. Because You’re Old (um, I mean not young anymore)
If you’re older than 50, and your income is still below the limits, you get to contribute an extra amount each year in “catch-up” contributions to your Roth IRA. That’s more tax advantaged savings towards your soon-to-be retirement.
7. You Can Withdraw the Contributions Without Penalty
With a Roth IRA you can withdraw all of your funds (both contributions and earnings) tax-free and without penalty at age 59 and a half. But there are circ*mstances that allow you to do a Roth IRA withdrawal even earlier.
While I don’t recommend this practice, you can withdraw funds from your Roth IRA prior to retirement to be used for whatever you want. As long as you don’t pull out more than your original contribution, you won’t be taxed or penalized. Pulling out earnings is what gets youtaxed and a 10% penalty. But there are even loopholes for that.
8. Use Funds to Buy Your First Home
You can withdraw some of your Roth IRA funds (contributions and earnings) if and when you decide you want to buy your first home. Again, I don’t recommend using your Roth IRA for a down payment, but it’s good to know the Roth IRA is so flexible.
9.Extra College Savings
WhileI believe youshould try and put retirement before paying for their kid’s college, you can use the Roth IRA funds towards a college education. Some people specifically use a Roth IRA tosave for college expenses.
10. It’s Easy to Start a Roth IRA
Opening a Roth IRA can be done online in less than 30 minutes. If you need more convincing or a helping hand through the process, check out the Roth IRA Rules and how I Opened My FirstRoth IRA.
Do you have another reason to start a Roth IRA? Leave it in the comments below…
