Do I need a Roth IRA?
The short answer, is yes. Here is a longer answer:
If you are eligible to contribute to a Roth IRA, then you need to do so. The corporate pension system is dying, and unless you work within a few select industries, or work for the government, you probably won’t have a traditional pension. And even then, it may not be enough.
The majority of people won’t receive a pension. Social Security may help, but again, it may not be enough. That means you need to take your retirement planning into your own hands. There are several great ways to do this, but the most popular, and most accessible, are Traditional and Roth IRAs and 401ks. And of these, the Roth IRA is my favorite (and the favorite of a lot of other people as well).
Why You Need a Roth IRA
The Roth IRA is one of my favorite investment vehicles. Hands down, it offers one of the greatest investment opportunities available. What makes it so great? The long term tax benefits. Let’s start by comping the two most common forms of IRAs – the Traditional and Roth IRA. They have some similarities: for example, they are both tax advantaged retirement accounts and they have similar contribution limits. However, there are two major differences: when you pay your taxes, and whether or not you are required to make withdrawals. Let’s look at these in more detail:
Traditional IRA: Traditional IRA contributions are made with pre-tax money, giving you a tax break in the current tax year if you meet income eligibility requirements. You don’t pay taxes on the contributions now, but you will pay taxes when you make withdrawals in retirement age. The other difference is the Required Minimum Distribution, which states that you are required to take withdrawals (and pay taxes on those withdrawals) once you reach a certain age. This law is primarily in place because the IRS wants to receive taxes on your IRA while you are still living.
Roth IRA: Roth IRA contributions are made with income that has already been taxed, and withdrawals are made tax free in retirement age. This is a huge long term advantage and makes it easier for tax planning in your retirement age. Since you have already paid taxes on the income used for contributions, there is no Required Minimum Distribution, allowing you to better plan how and when you take your withdrawals – if you decide to take them at all (Roth IRAs can be a powerful tool for estate planning).
Where to Start
First things first, you need to make sure you meet the Roth IRA eligibility requirements before you can start your Roth IRA. If you don’t meet the income requirements, you can always contribute to a non-deductible IRA (which is essentially a Traditional IRA without the tax deduction), then convert it to a Roth IRA. This makes it easy for high income individuals to open a Roth IRA.
The next thing you need to be aware of is contribution limits. Eligible participants under age 50 can contribute up to $5,000 per tax year (up to the tax deadline). Those who are age 50 and over can make an additional “catch-up” contribution of $1,000, for a total of $6,000 per year.
If you meet the general requirements, then you are a good candidate for a Roth IRA. Starting one could just be the best financial decision you ever make. For more information, check out our Roth IRA Guide, or the Roth IRA Movement.