Should I Use A Roth IRA?

The Roth IRA first came about through the Taxpayer Relief Act of 1997, and is named after its chief legislative sponsor, Senator William Roth of Delaware.  The Roth IRA allows a taxpayer to contribute money that you’ve already paid taxes on (or, after-tax dollars) into an individual retirement account.  The money then grows TAX FREE until you take it out.  This TAX FREE growth is the main advantage of the Roth IRA, and makes it a first choice for saving for retirement.

Tax Free Growth!

Think about this…lets say you put $5,500 into your Roth IRA account today, and in 30 years it has grown to over $55,000 (growing at 8% per year).  You’ve earned almost $50,000 of interest on that investment.  And now you can take it out TAX FREE to use for living expenses during retirement!!  Now, what if you put in $5,500 per year, every year for the next 30 years?  That means you would have invested $165,000 of your own after-tax money, and it would have grown to $678,402.27!  That’s over $513,000 of TAX FREE money!!  See why the Roth IRA is so good for you?  Especially if you are younger and have more time to let it grow!

But I need a tax deduction!

Some people say, “But I want and need a tax deduction today, not tomorrow.”  While getting tax deductions can be very helpful in reducing your taxable income today, TAX FREE growth is much better, in the long run!  For one thing, there is no guarantee that you’ll be in a lower tax bracket when you retire.  In fact, if you do a good job of saving over the next 20 or 30 years, there’s a good chance you could be in the same or a higher tax bracket when you retire.  Not to mention that today’s tax rates are near historic lows.  It is very possible that the government is going to increase tax rates in the future, not lower them.  Have you heard of our looming, out-of-control Federal deficit?  Another very strong case for a Roth IRA.  Paying taxes on your money now is like getting taxed on the seed instead of the harvest.

What if I end up making too much money to do a Roth IRA?

For married tax payers who make over $193,000, you cannot contribute to a Roth IRA.  If you make between $183,000 and $193,000, you can make a partial contribution to a Roth IRA.  For individual tax payers who make over $131,000, you cannot contribute to a Roth.  If you make between $116,000 and $131,000, you can make a partial contribution.  So lets say you open a Roth IRA now and start contributing every year, and then 10 years from now you make too much money to qualify for a Roth IRA contribution.  This will mean that you can no longer add new money to your Roth account for those years that you make over the limit (whatever the limit is at that time, since the limit goes up each year).  You can still keep your Roth IRA, and still keep it growing TAX FREE, you just can’t add to it any more.  If you happen to have a year where your income dips down below the threshold, you’ll be able to contribute to your Roth again in that year.  Even if you can’t add to your Roth anymore, you’ll likely have other options like a 401K or SEP IRA (if you’re self-employed).  And you may even have access to a Roth 401K through your employer.

A Roth 401K?!  What’s that?

A Roth 401K combines the benefits of a Roth IRA and an employer sponsored 401K.  Employees can contribute part of their salary post-tax to the Roth 401K, or they can contribute pre-tax dollars as a 401K contribution (if the employer has elected to allow both options in the plan).  Annual contributions are limited to the maximum section 415 limit, which is $53,000 for 2015.  Employers can make matching contributions to the Roth 401K’s for employees.  However, the matching amounts cannot be considered Roth money, so they are pre-tax contributions.  Once you leave your job, you can roll over your Roth 401K account into a Roth IRA.

Do I ever have to take money out of my Roth IRA?

Another big advantage of the Roth IRA is that there is no mandatory requirement to start withdrawing money from it when you reach age 70-1/2.  For Traditional IRA’s and 401K’s, you do have to start taking money out each year, beginning at age 70-1/2.  The same holds true for money still in a Roth 401K at age 70-1/2.  But not for Roth IRA’s!  If you need it, you can take it out any time after age 59-1/2.  If you don’t need it, you can let it stay in there as long as you want and keep it growing tax-free!

There’s a lot more to Roth IRA’s than what I’ve included here, but these are a few of the biggest reasons why many people, who qualify, should consider using a Roth IRA to save for retirement.  If you have additional questions about whether a Roth IRA is right for you, feel free to schedule a free consultation with us by calling 800-983-4222.

 

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