Sun 12 Aug 2007
Joe and I were having this long conversation the other night of how great Roth IRAs are. We basically came to the conclusion that there is absolutely no reason anyone should not have an IRA. Basically an IRA is an Individual Retirement Account. It is an account where you can invest money in stocks and mutual funds under a tax shelter. You are basically putting money in the account from your paycheck after income taxes have been taken out of the paycheck. You then invest this money in to mutual funds or stocks and when retirement comes around you are able to take all that principle and all the capital gains, tax free. There is a yearly limit to how much you are allowed to invest.
I just recently set up my Roth IRA because I did not really know much about them until lately… Some common misconceptions, questions and concerns that I had:
- What if I need to take some of that money out for some reason? Isn’t there a huge penalty?
You are actually allowed to take any of that principle investment out whenever you want. You only get penalized for drawing the gains on your investments. I wouldn’t recommend it, however, because you want to get that full benefit of that magic word called compound interest. - If I want to buy a house in the near future, all my money will be tied up in my Roth IRA. I could have put money in a discretionary investment account, earned interest and used some of that towards a new home…
You can draw up $10,000 of the gains you have made from capital investments towards the purchase of a new primary residents, not to mention you still can draw that principle the you have been investing. - Will I get taxed on the money when I go to draw it once I retire?
Nope that’s the magic of a Roth IRA. With a traditional IRA pretax dollars are invested in the account and you will have to pay taxes when you go to draw that money at retirement age. With a Roth IRA, you are investing with money that has already been taxed and you won’t have to pay capital gains taxes. It is one of the few loopholes the government gives on paying taxes on earned money.
Another benefit I have learned is that you can use some of your gains towards educational expenses as well.
There are some people that may not be eligible, mainly people in the six figure salary range. But if you are up there, I would probably personally rather be investing in things like real estate and small businesses (But that’s just me).
If anyone can think of more great benefits or any real huge disadvantages of contributing to a Roth IRA, please explain in the comments. From where I stand, I don’t see why everyone doesn’t have one…
-M
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September 12th, 2007 at 11:02 am
2 Reason I do not have a Roth.
1) The amount you save each year for retirement does not exceed the amount necessary for full 401(k) employer match. I have decided calculated that I can save X percent each year for retirement. Since my employer matches 25% for that X percent, I would be losing out on an instant gain of 25% (not to mention that it otherwise would be after tax dollars) by putting the money into the Roth.
Whenever I have discussed this with friends, they say that if I’m only contributing up to their match, then I’m not contributing enough. To this I respond that my employeer (though this is rare) will match 25% on up to the government limit (15,500). So my X is actually a pretty hefty sum.
2) The other money I am saving (like for a downpayment) is for short term goals. For this reason I invest the money in an ING account. Although I could invest this money in an ROTH and pull it out when I need the house, what if the stock market drops right before I decide to buy this house. The one thing people neglect to mention about ROTHs is that although you can pull out your contributions, you can’t do that if the value of the account is below what you’ve put in. With my ING account I’m guarenteed (FDIC) to have the money I’ve put in.
September 21st, 2007 at 12:10 pm
I LOVE my Roth IRA!!!
I contribute enough to my 403(b) to get the match money and everything else goes to the Roth IRA!
I also love my 529 College Savings Plan - which operates in much the same way as my Roth - after-tax contributions but tax-free for educational expenses!!!