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Is a Roth IRA Right for You?

Johns Wu Posted in Retirement by Johns Wu
February 1, 2008 01:06 PM - 10 Comments

piggybankchromelarge.jpgIf you’re looking for a sound long-term investment, then you’ve come to the right place. Below, I’ve listed a number of key points as to why a Roth IRA might be for you.

Earnings are Completely Tax Free
A Roth IRA offers something that no other other retirement plan offers, the ability to withdraw your earnings free of taxation. That means, when you finally decide to cash out on your retirement plan, you will get back every penny of your investment plus the earnings you have accrued completely tax-free.

Better Than Your Run of the Mill IRA
Currently, a Roth IRA allows a maximum contribution of $4,000 annually with the cap being raised to $5,000 in 2008 to account for inflation. The only drawback is that, unlike the traditional IRA, you don’t get a tax deduction for your contributions. But, in all honesty, a Roth IRA tends to be the better choice for most investors as long as your willing to maximize your contributions. It gives greater tax leverage to your retirement savings as long as your willing to stick with it.

Flexibility is Paramount
The advantage of having a Roth IRA is in its flexibility. Your investment can be utilized in a number of different ways. The IRS allows for a one-time $10,000 withdrawl from your Roth IRA towards the purchase of your first home. Your contribution can also be applied towards the payment of educational expenses. And if you’re really in a pinch, you can withdraw up to your maximum contribution at anytime without having to pay it back like a 401(k). Note that if you choose to withdraw any of your earnings towards the latter two options, there will be minor penalties.

Minimum Distribution Rules Don’t Apply
Let’s say you’re old and retired, but have other sources of income. There are no restrictions as to when you have to cash out your Roth IRA. That means, if you’ve already got it made, all you have to do is just sit back and watch with a smug look on you face as your tax-free investment continues to grow.

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  1. KJones said:
    on July 27th at 10:50 am

    Our family had an emergency and we made a withdrawal from a 401k account. This was a new tax experience for us. When we filed taxes at the end of the year, we had to pay the Internal Revenue Service extra taxes on that money that we borrowed from the individual retirement account.

    We were lucky to have this option and it was smart of my husband to opt in at his place of employment. My husband contributed directly from his payroll check each week to his IRA and his employer kicked in on the investment. It was a real help for our family emergency, but we did receive a penalty.

    This is very interesting. I imagine that you would need to be very devoted, and moderately financially stable in the first place, for the ROTH IRA to work well in your security plan.

    Before cashing in on the funds, I believe you need to be over 59 years old and your account needs to be at least 5 years old for you to reap the full benefits.

    I am curious if there is a higher yield for this modified IRA.

    I wonder if this would be an ideal way to leave a sum of cash family as an inheritance upon your death.

  2. Amadeus said:
    on July 27th at 08:10 pm

    I haven’t made the jump to a Roth IRA yet, but hope to some time soon. Perhaps this is because I’ve been woefully neglecting my savings and retirement investment plans :) .

    From what I understand, for the great majority of people the Roth is going to come out ahead over a traditional IRA as far as the purposes of long term investment go. The loss of deductibles you eat on the annual contributions really become small fries when you compare that money to a healthy investment account that’s had a few decades to let compound interest catapult it into field of massive returns. The ability to then pull all that money out without any taxation is pretty hard to beat.

    That said, the traditional IRA probably can still be used effectively for more near to middle term investment horizons, such as family emergency planning like KJones was talking about.

  3. James said:
    on July 28th at 04:55 am

    I really like the idea of no restrictions of when you can cash out your plan. In the UK we have a maximum age of 75. The flexibility that this would give would be enormous. It is quite clear that many baby boomers are not looking at retiring idly but will be doing side businesses or part time jobs for as long as they can, while others will have non-pension investments. And it makes sense, as people who keep working, even part time, tend to live longer and have a greater level of mental activity.

  4. ciscogrove said:
    on August 1st at 02:14 pm

    The Roth IRA is a great vehicle. But like all investments, there are costs associated with the product.

    Some people use mutual funds. Even theno-load funds have 12b-1 fees. Always, and I mean, always learn how much of your investment will be devoured by fees.

    Look at performance of your investment vehicle. The Roth IRA IS NOT the investment vehicle, what you put into it is. Some people buy stocks while others buy mutual funds. Again, you should not only know the costs but the performance history of the investment.

    Compare the Roth against other like programs. Which one stacks up best? Will it continue to stack up 5, 10 years down the road? Maybe, maybe not but if it wins today, it’ll probably win tomorrow.

    Above all, do your homework.

  5. gkr said:
    on August 4th at 11:54 am

    Apart from the traditional IRA, the advantage that Roth IRA gives is significant for many people. It was not realized in the past. But with the growing number of diseases, road accidents and other pandemics to the human society people started to plan for future emergencies and also for better retirements. If you rely only on the traditional IRA and you have spent all your earnings for the family expenses, the retirement fund that you will get may not give you the lifestyle you want at that time. You will become dependent on your children to maintain the desired lifestyle. Roth IRA helps you make a plan for that from now itself.

    These are far better than mutual funds in that the mutual carry much expenditure which they do not tell you but only deduct from the returns. I have seen in my personal experience that mutual funds are the last best performers in a volatile market. With changing global trends and business we can expect a lot of volatility in the stock markets and this will beat the mutual funds heavily to feed the fund managers and their lifestyles. Roth IRA takes care of all kinds of market scenarios without feeding someone’s belly. Treat it as a non-touchable safe investment until an emergency comes.

  6. Lex Bernstein said:
    on January 5th at 05:47 pm

    Greetings-
    Regarding an established Roth account, can you use funds to invest in your life insurance?
    I took advantage of the Roth Accounts early on rolling over my IRA and my 401K at the time. Since my income has dropped off quite a bit, I’m not plowing money into the Roth right now. Yet, I wondered if an investment that was owning life insurance for my grandchildren was an option.
    Thanks-
    Lex

  7. Richard said:
    on March 30th at 12:06 pm

    Very useful article about the Roth IRA. One point about after-tax contributions will clarify your article a bit more. Here it is

    Consider Jackson who earns a $65,000 annual salary. Jackson is currently in the 25% tax bracket and contributes $3500 a month to his Roth IRA. Jackson would therefore pay income taxes of $3500 x 25% = $875 and would contribute $3500 – $875 = $2625 to his Roth IRA. If Jackson expects to be in a 33% tax bracket upon retirement, he will have to pay $3500 x 33% = $1155 upon his retirement. Therefore by making after-tax Roth IRA contributions now and getting taxed at the lower 25%, Jackson avoids having to pay taxes @ 33% when he hits retirement.

    Source: http://www.definerothira.com

    And that is indeed the beauty of Roth IRAs. If you expect to be in a higher tax bracket when you retire, it is best to pay taxes now and get it over with. Besides, you do not want to build your retirement savings tax-deferred only to be hit with taxes when you retire, you do not want to owe a single dime to Uncle Sam!

  8. Love said:
    on September 19th at 08:28 pm

    Is it wise to get Roth IRA even though you have not even reached the age of 30?

  9. J said:
    on November 30th at 12:54 pm

    Why do we allow the government tell us how much money we can save for our retirement?

    How come the GOP the small gov party ( yes I am lol at that ,too) havent changed the law so that we are not dependent on the government?

    If anything good Obama has done, its proven to the American people that socialism is for losers

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