The Roth IRA Movement

If you read a lot of Personal Finance, you’ve probably noticed a similar theme on your favorite websites this morning: they are all talking about Roth IRAs.  As dues-paying members of the blogosphere (and three writers who felt you wanted a break from graphs, if only for one day…), we also joined Jeff Rose’s Roth IRA Movement slated for this morning!  So, let’s talk about the Roth…

What is the Roth IRA?

The Roth IRA is an individual retirement account in which the main feature is you pay tax on money before you invest it, but don’t pay taxes on the back end when you eventually withdraw in.  In essence, any money in a Roth IRA is a bet that your taxes in the future will be more than your taxes today.  Here are a few features of the account:

  • Put up to $5,000 in your account in 2012 ($6,000 if you are over 50).  Generally, this applies to your spouse as well

    (Alviman)

  • Withdraw your contributions at any time
  • After your money has seasoned for 5 years you can make certain qualified distributions from the earnings on the account
  • Generally, accounts can be opened at banks and brokerage houses and have similar fee schedules and costs to regular accounts

Don’t Take My Word For It…

This is a three writer site, so I polled Bryan and Cameron on what they thought about the Roth IRA.  First up, the wordsmith Bryan Sullivan:

Put your money to work but let it come home for dinner when you need help with the house.  For those of us less comfortable parting with our money for 40+ years… you don’t have to break the piggy bank to get your pennies back.”

(I assume he wants us to read that to a beat?  Editor’s note: traditionally, IRAs can be tapped at 59.5 years of age)

And Cameron Daniels:

“If you work for a company, taxes are taken out when you receive income. The taxes are paid from revenues that have a sales tax added onto them. When you invest the money or spend the money, taxes are taken out. And, when you finally die, taxes can also be levied. A Roth IRA is one method to avoid taxation of the money you invest. If you believe your marginal tax rate will be higher in retirement than it presently is, a Roth IRA is an absolute must. If you believe they will be lower, I would suggest a traditional IRA AND a Roth IRA. The value proposition is never truly an either/or.”

Need Even More Proof?

Roth IRAs (and IRAs and 401ks in general) have been pretty common topics over the years.  Read these posts form the archives, and learn about some reasons we feel Roths are superior to traditional IRAs – including the simple fact that unless your tax rate is 0%, you can actually shield more tax-free money with a Roth type account than with other accounts.  Anyway, take a trip through our archives!

The second one explains the rationale behind the ‘shield more money’ statement.

The Roth IRA… Open One Today!

If you qualify, we here at DQYDJ feel you should strongly consider opening a Roth IRA – and do it before April 17, so you can make a 2011 contribution!

Don’t delay; Roth today.

 

Comments

  1. says

    Now, if only I could lay hands on that extra $6k I had laying around!  Seriously, Roth IRAs are an excellent retirement savings vehicle.  We converted ours to RothIRAs the first year(s) we were allowed to.

    • says

      And yes, you make a good point – even if you make too much money (roughly $180k as a couple in 2012, but check the IRS) you can open a traditional IRA and convert it, just paying tax. Or, convert traditional IRAs you already have.

      My strategy is to retire with both traditional accounts for 401(k)s and Roths, if at all possible…

  2. says

    Roth IRAs are great so long as the tax code does not change.  I’m really expecting that a consumption will come into play between the time I contribute and the time I could make withdrawals, just under 40 years’ time.

    My marginal tax rate will be higher, however, I’m not really excited about saving cash in an account that cannot be tapped for almost four decades.  I’ll stick to taxable accounts for the time being.  Maybe with a consistent paying J.O.B. I’ll see a Roth as a better storage of funds.  For now, a little too restrictive for my tastes.

    • says

      Excellent point by JT. A Roth is fabulous under current tax code, but if something like the FairTax ever gets serious consideration, all that tax free savings becomes moot.

      • says

        Yeah – any sales tax kills it. Hopefully it also comes with a sneaky way to extract the money at the same rate as it was entered – YMMV.

    • says

      72(t) to the rescue, my friend. I think some combination of sneakiness, reading the tea leaves, and a 72(t) will let us get most of it out as promised.

  3. Bryan Sullivan says

    i get into a groove sometimes where im saving every penny and then other times where I am easier going.  I like to know that if im going over the top and committing too much of my money, i will not be punished if i have to take some back.  

    • says

      Thanks for the compliment! For arcane details and over-analysis (when you’re ready) click through to the previous articles… haha!

  4. says

    “Don’t Delay; Roth Today” ?  Nice PK!  For most just starting in the workforce, a Roth IRA/401k is a great choice since tax rates will most likely increase in future years due to salary increases.  The other obvious benefit is the time value of money.

  5. says

    ROTHs are one of those things that are nice to put on auto-pilot.  Fifty or a hundred or $200 a month, and shares of high-yielding vehicles inside, all compounding merrily away. 
    But my pessimist side fears that a change is likely 5 or 10 years down the line…. as long as it’s more than 10 years.  Then I won’t care so much.

    • says

      Even $416.67!

      And yeah, VAT, National Sales Tax… even massive state sales tax increases… all would kill Roth IRA savers. The more people that save in a Roth, the bigger the political bulls-eye becomes…

  6. says

    Honestly, I’m not a big fan of the Roth IRA mostly because I have doubts that income taxes are going to be higher; in fact, I think they are going to be lower.

    Both political parties have made raising income taxes (at least on the middle class) political suicide, which is why both parties have been looking at alternative taxes instead: VAT and national sale tax (republicans) – VAT, carbon tax, bank transaction tax (democrat). I really can’t say anymore that I’ll be paying income taxes in 30 years, so it makes sense to take the tax advantage now when I know what the tax benefit is.

    • says

      Yeah, I hear you – hedge your bests because any sort of consumption tax or VAT is a massive hit to Roth IRA savers… and who knows how Traditional IRAs/401(k)s will be affected. Sneaky? Of course – but I still like the idea of having multiple tax statuses, just in case.

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