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Do You Need a Roth IRA?

by Ryan Guina

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.

Do you need a Roth IRA?

Yes, you need a Roth IRA!

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.

Where to open a Roth IRA. We have put together a list of the best places to open an IRA.


Published or updated January 6, 2014.
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{ 6 comments… read them below or add one }

1 Krantcents

I don’t know anybody that could pass up an investment that grows tax free. I try to take advantage of it every opportunity I can.

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2 Ryan Guina

So do I. I converted my Traditional IRAs last year, as well as an old 401k that I rolled over into an IRA. I had to pay more taxes now but it will be well worth it in the long run!

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3 Taline

I’m all about the Roth IRA…although I work for the government and we are supposed to have a great pension system, recently it has been under attack (in Ca). For the first time, there may not be enough money in the pension funds to last me past 10 years into retirement.

I’m glad I never relied on it and built passive income streams like real estate rentals and have investments along with a Roth IRA…one can never rely too heavily on one source of income stream when it comes to retirement.

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4 SM

Have a Roth and current 401k going at the moment. I have a long neglected 401k from a former job that has just been sitting there. Thoughts on whether it would be better to roll it into a Traditional IRA or leave it in the 401k?

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5 Ryan Guina

In general, you will be better off rolling your old 401k plans into a Traditional IRA because it will give you access to more investment options, and lower cost investments. Additionally, some 401k plans require participants to pay a monthly or annual fee if you are no longer employed by the company (check your plan for specifics). The only time it is better to leave your investments in a previous 401k plan vs. moving it to an IRA is when you have access to lower cost investments, or investment opportunities which aren’t available in an IRA (both of these are rare with 401k plans). For more info, I recommend reading the following article: Should You do a 401k Rollover into an IRA?. best of luck with your decision.

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6 Chris

I am 28 years old, but I am new to this 401K, IRA thing.
I am employed, but no offer of 401K from my employer.

So upon hearing about Roth IRA. I think I am interested.
But instead of putting $300 a month (an example figure) into Roth, if I put the money in a safe place, wouldn’t it be better? because I don’t have any fee or penalty if I need to use it all when I’m 50 years old.

Is this a better alternative? or Am I missing something here?
Do you get interest in your investment when you put money into Roth? Does it compound yearly?
I think I am just scared if I am unable to use the money whenever I want, or if I decided to take all of my money and retire in other country or something.

any advice? Should I talk to a financial adviser from my local bank?

Chris

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