For someone steeped in personal finance, it seems strange to realize that not everyone knows about the Roth IRA. However, as Jeff Rose at Good Financial Cents recently discovered, there are a number of people who have no idea what the Roth IRA is. As a result, he is starting a movement to raise awareness about the Roth IRA.
This is a great idea, since the Roth IRA can provide you with a great way to save money for retirement on a tax-advantaged basis. I’m all for a Roth IRA movement that will raise awareness. As part of my participation in this movement, I would like to share 3 reasons that I love the Roth IRA:
1. Tax-Free Growth for Your Money
When you contribute to a Roth IRA, your money grows tax-free. It’s true that you make your contributions with pre-tax earnings, though. You won’t get a tax deduction for your Roth IRA contribution. However, that doesn’t have to be a bad thing. You pay taxes now, and your money grows tax-free. You never have to pay taxes on your earnings. Contrast that with the Traditional IRA: You may get a tax deduction now, but when you withdraw the money, you pay taxes — including on the money you earn through the power of compound interest.
The Roth IRA can help you save money overall if you believe that taxes will go up. If you think that taxes will be higher when you retire, or if you think that you will be in a higher tax bracket later, the Roth IRA can be helpful. Pay taxes on your income now, at a lower rate, and enjoy the tax-free withdrawals later on, even if taxes go up.
2. No Required Minimum Distributions
One of the difficulties that can plague retirees is the required minimum distribution. Once you reach the age of 70.5, you have to withdraw money from a Traditional IRA — whether you need it or not. When that happens, of course, you have to pay taxes. The Roth IRA, though, doesn’t come with required minimum distributions. If you don’t need the money, you never have to withdraw it. It also allows you to withdraw less money if you don’t need as much. There is no forced withdrawal with the Roth IRA, and that can be a big bonus when you are retired and managing your resources.
3. Early Withdrawal Possibilities
Another great thing about the Roth IRA is that you don’t have to fret as much about early withdrawals — as long as you only withdraw your contributions. Once you begin withdrawing your earnings early, there are penalties. However, one of the features of the Roth IRA is that you can withdraw your contributions anytime, for any reason. So, make sure you understand how much money you have contributed, and make sure you are only withdrawing those contributions if you want to avoid penalties. (However, realize that you will still be subject to opportunity cost, and your principal will no longer be in your account earning money for you.)
If you qualify to contribute to a Roth IRA, it can be a real help to you. Consider the advantages, and determine whether or not a Roth IRA is the best option for you.