Four reasons you need a Roth IRA

In our last post we talked about the importance of saving enough in your employer sponsored retirement plan and cautioned that even if you were contributing your full match, it might not be enough. The vast majority of us will need additional savings and a good place to accumulate that is in a Roth IRA.  A Roth IRA is an excellent savings vehicle because, unlike the traditional IRA, the money in a Roth grows tax free and the withdrawals are not taxed either.  This makes it preferable to the traditional IRA for retirement savings, but there are other advantages to a Roth IRA as well. Here are four reasons you should save money in a Roth IRA: The Roth IRA gives much more freedom of choice.  In an effort to keep the plan simple, many 401(k) and 403(b) plans do not include investment choices that would help diversify your portfolio, nor do they offer the most cost-effective investments available.  Most employer plans limit you to investing in only a handful of mutual funds.  While mutual funds are good investment vehicles, ETFs (Exchange Traded Funds) have emerged as a favorable alternative to mutual funds because of their lower cost and flexibility.  In a portfolio that is large enough to accommodate them, individual stock holdings are also a good choice for low expense and diversification. The money in a Roth IRA that is not inherited is not subject to a Required Minimum Distribution (RMD).  Roth IRAs are funded with after-tax money and the withdrawals from a Roth are not taxed on the way out. Because of this, the IRS has no need to force withdrawals from a Roth because there are no taxes to collect.  Not being subject to an RMD makes the Roth IRA a more flexible option for retirement income.  You can also continue to contribute to your Roth after the RMD mandatory age of 70½ if you are still… | Read More »

If you think you might need a Roth, you probably do

Roth IRAs are a little like breath mints – if you think you might need one, you probably do. And, like mints, they offer refreshing relief from common irritants, like taxes, which can leave a sour taste in your mouth and a big hole in your retirement portfolio. Here’s how the Roth IRA works and why nearly everyone who qualifies, especially younger investors, should open one now. The money you invest in a Roth IRA grows tax free. Consider the implications of this short statement. The money you put in a Roth IRA is yours alone. The government has no claim on it and, after the account has been opened for five years, you can withdraw those contributions at any time with no taxes and no penalties. None, which means… You won’t have to worry about pesky RMDs. Maybe you’re too young now to even wonder about Required Minimum Distributions, but you’ll worry about them plenty once you turn 70 ½ and have to make these yearly withdrawals and pay the requisite taxes on them from your traditional IRA. Do your older self a favor and start putting money in a Roth today. Then, you can sit back and watch it grow. The Roth allows you more freedom than an employer sponsored retirement plan like a 401(k), 403(b), SEP or Simple retirement account. You can contribute up to $5,500 annually to a Roth IRA if you earn less than the threshold set by the IRS. Unlike a 401(k), in which you’re limited to investments selected by your employer, a Roth allows you to choose from a wide range of investment options including stocks, bonds, certificates of deposit, mutual funds, exchange-traded funds and more. You can open a Roth no matter how young you are, as long as you have compensation income to contribute to it. You just can’t contribute more than you earn. Also, even though you can withdraw from… | Read More »