The Roth IRA is probably my favorite investment vehicles, and it’s something I’ve written about pretty extensively here on this site. When I started hearing stories from folks recently about how a lot of people have never even heard of the Roth IRA, I was a little bit shocked. Maybe I shouldn’t have been.
Jeff Rose of GoodFinancialCents.com recently gave a talk to a group of graduating seniors at his alma-mater about investing and retirement. While he was there he took an informal poll and asked who knew what a Roth IRA is. Out of 50 people attending, not a single one knew what a Roth IRA was. For Jeff that moment was a bit of an ephiphany, and he decided to start the Roth IRA Movement. The Roth IRA Movement is a group of 140+ bloggers and personal finance journalists all coming together today to write about the Roth IRA, and to get others to start thinking about saving for retirement.
I decided to pitch in and give 10 reasons why the Roth IRA should be your retirement account of choice.
10 Reasons To Love The Roth IRA
There are probably a million and one reasons to love the Roth IRA, but for the sake of brevity, here are my top 10.
- Tax free withdrawals at retirement: The IRA and the 401(k) allow you to add funds to your account before the money gets taxed. That’s great because it allows you to reduce your taxable income, and lowers your taxes now. The Roth IRA has a great benefit as well, however. You pay taxes on your income now and fund your Roth IRA, and then you get to take your contributions and earnings out without paying taxes at retirement. Who doesn’t love tax-free money at retirement?
- Withdraw contributions at any time: When you contribute money to your Roth IRA, you can withdraw those contributions without penalty or taxes at any time (not so with earnings). While I wouldn’t suggest doing that as it can short-circuit your gains, it is nice to know that if an emergency arises and your emergency fund doesn’t cover it, this may be an option.
- No age limit for a Roth IRA: There isn’t an age limit to have a Roth IRA, so even your children can have one! As long as you or your child have earned income, and you’re below certain income thresholds, most likely you will qualify to contribute to a Roth IRA.
- Good way to diversify tax treatment: As mentioned earlier in this post Roth IRA withdrawals at retirement are tax free. By contributing to an IRA (pre-tax) and Roth IRA (post-tax) you can diversify your situation when it comes to taxes. That can be especially important if you’re unsure how your tax rates will compare – now versus at retirement. Hedge your bets and contribute some to each.
- High income limits: The income limits for contributing to a Roth IRA are relatively high, so most people will be able to contribute. The limits are $193,000 if you’re married filing jointly, or $131,000 if you’re single, head of household, or married filing separately and did not live with your spouse for any part of the year.
- Perfect for procrastinators like me: The Roth IRA account type allows people to contribute to their Roth IRA right up until tax day of the following year. So for example, if I wanted to start a Roth IRA and fund it for 2014, I could do that right up until April 15th, 2015, the day that taxes are due for 2014.
- You can use it to save for college or a home without penalties: You can take contributions out of a Roth IRA to pay for college expenses, without incurring any penalties. While it isn’t always a good idea to short circuit gains in your account by taking money out, if you do run into the situation where you need to, you won’t be subject to the normal early withdrawal penalties and taxes. Withdrawing earnings would still be subject to taxes, but no penalties. For first time homebuyers, you can withdraw up to $10,000 tax free from your Roth IRA contributions and earnings, just be aware of all the fine print on withdrawing for a home purchase.
- The Roth IRA can secure your golden years: If you want to be secure in retirement you need to start saving, and start now! The Roth IRA is a great way to get started because you can invest in smaller increments – which will add up to much larger dollar amounts by the time you retire.
- A Roth IRA will usually have more investment options than your company 401k: One great thing about the Roth IRA is that they’re flexible. You can invest in what you want through the Roth IRA. Company 401ks aren’t always as flexible as you’re held hostage to whatever plan administrator your company chooses, and
- Easy to open a Roth IRA: Opening a Roth IRA is really easy. Companies like Vanguard, Betterment, Wealthfront or Axos Invest have made the signup process to get started with a Roth extremely easy. In many instances it will only take a few minutes to open an account. Depending on your investment strategy choosing your investments may take a bit longer, but it isn’t as complicated as some people might think. Just choose where you’ll open the account, fund the account, and choose your investments.
Those are a few of the reasons why I love the Roth IRA, and why I think you should give the Roth a look as well.
Have you started your Roth IRA yet? If not, what’s holding you back? Tell us your thoughts in the comments.
Roth IRA Contribution Limits
| Year | Age 49 and Below | Age 50 and Above |
|---|---|---|
| 2002-2004 | $3,000 | $3,500 |
| 2005 | $4,000 | $4,500 |
| 2006-2007 | $4,000 | $5,000 |
| 2008-2012 | $5,000 | $6,000 |
| 2013-2018 | $5,500 | $6,500 |
| 2019-2022 | $6,000 | $7,000 |
| 2023 | $6,500 | $7,500 |
| 2024 | $7,000 | $8,000 |
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Great information. Do you think people are just as confused about rolling over retirement money into an IRA?
You mean rolling over from a 401k after leaving a job? I would say probably so, yes. Here’s a post I wrote last week about doing a 401k to IRA rollover after leaving a job in case that helps folks.
Which company do you prefer for yours? Is it a good idea for someone with a lot of student loan debt to start investing in a Roth IRA before that debt is gone?
I prefer Vanguard for mine, but here’s a post I did on the topic of where to open a Roth IRA. I can’t speak specifically to the student loan before Roth question as my student loans were paid back years ago so I never had to consider the question. I suppose it may depend on how much student loan debt I had, what the rates were, etc.
Awesome, thanks for the link! So it would come down to the interest rates to pay on the loan vs. interest rates that could be gained in a Roth IRA..
I’ve had a Roth IRA for every year since graduating from college. Wish I would have started when I started working (at 16).
I love the self directed IRA over the roth because it allows for further diversification in your retirement account.
Wow… no taxes on it when it goes in and then when it comes out you aren’t taxed on it either?? Sounds too good to be true.
How good is Vanguard for Roth IRA?
The money you put into the Roth IRA has already been taxed, so there is tax money being taken out before you put it in.
Vanguard would be one of my top options for a Roth IRA, along with Betterment.