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5 Reasons to Favor a Roth IRA

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Pink piggy bank with glasses standing on books next to a blackboard with retirement savings message.  Sharp focus on the piggy b
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By David Ning

When you contribute to a Roth Individual Retirement Account you typically don't have to worry about paying taxes on that money or its investment gains ever again. And employers are increasingly adding a Roth option to their 401(k) plans. Aon surveyed 400 employers covering 10 million employees in 2013 and found that half now offer a Roth 401(k) plan. Here are some of the benefits of saving for retirement in a Roth account:

Having a tax-free account in addition to your pre-tax savings gives you more options to reduce taxes in retirement. Tax complications don't end when you leave the workforce. In fact, your taxes in retirement can be more complicated than in the years when you were working. For the most part, you'll want to withdraw money you have in taxable and Roth accounts first and delay paying taxes on your savings in traditional retirement accounts as long as possible. But it's also possible that you could pay significantly higher taxes if you delay too long and your traditional retirement account gets big enough for required minimum distributions to force you into a higher tax bracket. With money in different pots, you'll have a chance to run different scenarios and maximize your after-tax retirement income.

You can effectively contribute more of your wealth to tax-sheltered accounts every year. A dollar in a Roth is worth more than a dollar in a pre-tax account because Uncle Sam will eventually take a share of money in a traditional 401(k). While the annual limits on contributions to Roth and regular 401(k)s are the same, those who contribute the maximum to a Roth will effectively protect more of their wealth from future taxes than those who deposit the same amount in a traditional 401(k). Having $17,500 in a Roth account that won't be taxed again means that entire account balance belongs to you, while $17,500 in a regular 401(k) that will be taxed at the 15 percent rate is ultimately worth only $14,875.

If tax rates increase, money in a Roth IRA will be even more valuable than the same amount in a pre-tax account. Tax rates are currently much lower than they have been throughout much of our country's history. If taxes are increased, your Roth account will become even more valuable because you already paid the taxes on your contributions at the lower rate.

You will feel poorer. Diligent savers might look at the total value of their portfolio and dream about the lifestyle the sum can afford. However, when you pay taxes first, your final account balance may end up being a bit lower. However, the smaller account balance might also motivate you to kick your savings rate into high gear. Getting ahead financially is often a game of psychology. If a smaller after-tax account keeps you from wasting more of your hard-earned cash, you will ultimately be better off in retirement.

You might be able to tap your Roth contributions penalty-free before you reach 59½. There are ways to tap money in pre-tax accounts too, but there's often a 10 percent early withdrawal penalty. With a Roth, contributions can be withdrawn from the account after five years, assuming the employer allows in-service withdrawals. And money rolled over from a Roth 401(k) to a Roth IRA can be taken out penalty-free five years after the rollover date, which can be very handy if you run into an emergency.

Many people are better off deferring taxes on their retirement savings for as long as possible because very few people will have an equal or higher tax rate in retirement than they do while working. However, doing at least part of your retirement savings in a Roth 401(k) will give you options in retirement. Some employers will allow you to save in both a traditional and Roth 401(k) at the same time, which helps you to hedge your bets about future tax rates.

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42 Comments

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raginnftmfs

If you aren't eligible for an employer-offered 401(k), because a lot of people aren't, then your next best bet would be the IRA or a Roth IRA. Learn more about these in general at http://www.mutualfundstore.com/individual-retirement-account-ira. It's not hard to get one going, but you need to start sooner rather than later because these kinds of accounts do better over a longer period of time because you have more of a chance to put more in them.

May 16 2014 at 12:53 AM Report abuse rate up rate down Reply
jesse.tropman

I really do think the Roth is the way to go if you qualify for it. Tax rates are on their way up with the government taking over health care, and I would much rather pay today than pay in 30 years when the government really has run out of money and is taxing us into oblivion. I hope it doesn't come to this, but better to be prepared. As for saving to the Roth, actually most financial experts recommend this. Watch Suzey Orman or Dave Ramsey sometime and see how much they talk about it.
They also recommend switching a whole life insurance for term life insurance policy which you can get for about $25 bucks a month from LifeAnt, and save the difference. I used to pay $340 for mine, and now I pay $32. I save the difference in my Roth like a good boy (well most of it anyway) and hopefully the market doesn't crash too far in the next correction which is sure to come soon.
I think the article really missed pointing out that a 401k is the #1 place to save for retirement first IF your company has a match. Thats free money that can not be passed up.

April 26 2014 at 2:21 PM Report abuse -1 rate up rate down Reply
foreontee

Having to pay a 10%penalty on the amount you withdraw from your IRA's before 59 1/2 is pure bullshit. I needed to this past year to keep going yet I will have that penalty run up my ass. I knew about it going in, it was not right then, it's not right now.. That's my money . I don't mind the regular tax, fully expected it, no problem paying it. I 'd like to take a bat to head(s) of the ******** who dreamed up that bogus10% tax..

April 25 2014 at 5:35 AM Report abuse -1 rate up rate down Reply
cslinz62

Let's be real here. Not everyone has the knowledge of what a Roth IRA is. Or any kind of a retirement plan. It is what it is. Some folks will never pull themselves out of poverty & save for retirement. If it weren't for my inheritance, I'd be in the same boat as most average working folks. I invested it & keep it invested. And I work a minimum wage job & live like I'm poor. I am a loner & a simpleton. I don't need much $ to live on at 51. I'm single & alone. I'm not guaranteed tomorrow but if I live to retirement age, I think I'll come out ok. If they get Obama out of office.

April 25 2014 at 1:15 AM Report abuse -1 rate up rate down Reply
SPQR

Yup take all your money and put it in the market and fools gold and see what happens !

April 24 2014 at 9:22 PM Report abuse -1 rate up rate down Reply
1 reply to SPQR's comment
merstockgto

You must be one of those people spinning their wheels and not invest for your future. I have invested in the stock market since 1980 and I am in great shape because of it. You are the FOOL.

April 25 2014 at 12:44 AM Report abuse rate up rate down Reply
jpark377

The Roth IRA is one of the best retirement accounts available today. The fact that money that has grown substantially tax-free could be withdrawn tax-free, without any required minimum distributions is amazing. The "Mediocre One" in the White House, and his band of thieves are trying to force RMD's on Roths in this budget so they can frorce the money out of those accounts, so they can be eventually spent and taxed, or invested in a taxable account. It shouldn't surprise anyone that this Commander-in-Chief promotes class-warfare so readily: no president before him has attempted this type of "tax-grab" on Roth IRA's.

April 24 2014 at 9:21 PM Report abuse rate up rate down Reply
SPQR

Morons invest in Roths

April 24 2014 at 9:20 PM Report abuse -1 rate up rate down Reply
SPQR

I can see that everyone is being fooled by the Roth...good luck!

April 24 2014 at 9:12 PM Report abuse -1 rate up rate down Reply
GMG..

A Roth IRA beats a standad IRA hands down. The former is the best investment holding vehicle known to man so far.

April 24 2014 at 9:03 PM Report abuse rate up rate down Reply
weilunion

Do you really believe in this fantasy world of Wall St. academics and advice? They will steal your 401K faster than you can skimper to the veterinarians

April 24 2014 at 8:25 PM Report abuse -1 rate up rate down Reply