Do I need a Roth IRA?
The short answer is yes. Here’s the 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.
Yes, you need a Roth IRA!
According to data from the Bureau of Labor Statistics, just 23% of workers in all sectors have a pension plan.
And while social security helps, it may not be enough to sustain your retirement needs.
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 millions of savvy young investors and wealthy retirees.)
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.
Comparing Traditional IRA and Roth IRA
Let’s start by comparing 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 differences 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).
Even More Reasons You Need a Roth IRA
Aside from its tax and withdrawal benefits, there are several pros to opening a Roth IRA you may not be aware of.
Here’s a brief overview:
#1 A Roth IRA is easy to sign up for, and it’s flexible.
- It couldn’t be easier to register for a Roth IRA. We’ll talk more about eligibility requirements below, but essentially, if you have income and can meet the minimum contribution requirements, you’re eligible to enroll at any age.
- When it comes to contributing to your Roth IRA, you have until tax day. For example, rather than having to make your 2018 contribution by January 1, you have until April 15, 2019.
- You can convert your 401k or traditional IRA to a Roth IRA. Perhaps you chose an alternative plan in your younger years but want to reap the tax-free benefits of a Roth IRA. If so, converting to Roth IRA is a simple process allowing you to switch your funds to Roth.
#2 Penalties Are Minimal.
- While we don’t recommend tapping into your retirement for just anything, life happens. You can generally make withdrawals from the principal free of penalty or taxes any time. After age 59 ½, you can withdraw earnings penalty free (Keep in mind both of these options require your account to be open at least 5 years). Before age 59 ½, such a withdrawal may get you a 10% penalty.
- If you’re going to college or buying your first home, you may be able to withdraw from your Roth IRA without being penalized. For a first home, you can withdraw up to $10,000.
#3 The Benefits To Your Descendants Are Unmatched.
- Did you know you can open a Roth IRA for your child? Remember, there are no minimum age requirements to open a Roth IRA, and in this case, you act as the guardian of your child’s account until he or she reach adulthood. The requirements are the same as they are for a typical Roth IRA. You do need to show your child’s income, which could come in the form of a traditional salary but also from a gift or allowance. Starting the account at a young age increases its growth tremendously and sets your child up for financial success.
- Perhaps the greatest benefit to a Roth IRA is its tax-free nature. Your children won’t pay taxes on your Roth IRA in the event of your passing, as long as you’ve had the account open for at least 5 years.
Where to Start
Now that you know the benefits of a Roth IRA, you’re probably wondering how to start your own.
First things first, you need to make sure you meet the Roth IRA eligibility requirements before you can start your Roth IRA.
- If you’re single or the head of your household, your earnings can’t exceed $120,000.
- If you’re filing jointly with your spouse, your combined earnings cannot exceed $189,000.
- Finally, if you’re married, filing separately, and lived with your spouse during the last year, your maximum eligible income is $10,000.
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 conversion option makes it easy for high-income individuals to open a Roth IRA.
Next, you’ll need to be aware of 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 is as easy as looking at a brokerage like an Ally Invest Roth IRA, and it might just be the best financial decision you ever make.