I can’t hide my love of getting free money/stuff, or my love of compound interest, or my love of the Roth IRA!! I first got this love from World Savings Bank with my little passbook savings account at age 7. I like to go by the bank with my parents, with my little printed passbook, and have the teller run it through the machine and print out a new number. The best part was the number was always getting larger, even if I hadn’t put anymore money into the account. I loved the idea that I was getting free money from the bank. I watched my little passbook pages fill up with an ever growing number and one day it hit over $100!! I was sold that free money was the way to go.
So, after college I got a real job. I had very few bills living at home, and later a sweet little apartment with a $600 rent was awesome too. I had to start finding a way to make my money go to work for me. I remember Jerry Seinfeld saying his money is a bad worker and I laughed, but I never believed it. I knew my money was raised right, and could work well for me. It would show up to work on time and do the right things for me. So, I started, after some research, my Roth IRA at the age of 24. I put $1,000 in, to get it started, and added $120 a month. After a few years I upped the monthly payments to $250, and then $450 a month about 5 years into it, maxing it out. I also started my wife’s IRA after awhile with $1,000, and add to it monthly, not maxing it out yet. Some year’s, at the end I will dump a little more in there for her. But, the Roth is my number one, go to account for saving for retirement. Here is why….
So in 2017, I can put away $5,500 a year in my Roth, and if you are over 50 you get an extra $1,000 catch up. You can also start your Roth at any age, but it grows tax free longer if you start younger, making it more valuable in the long run. But, the Roth is an account for every age and everyone can benefit from its savings. If you are married you and your spouse should both have one each for more growth and more tax savings.
You pay your taxes on the contribution up front on your Roth IRA, but you you get tax free withdraws later, and no one taxes any of your gains from investing it. Tax free income later in life is a great thing, and if you are expecting to be in a higher tax bracket later this is awesome. You can also pick how your Roth in invested. I got mine spread between four mutual funds. I followed the Dave Ramsey idea for this. Growth, Growth and Income, Aggressive Growth, and International mutual funds. I loved the flexibility, and I was in control of my money still.
Roth’s also can work as a savings account for some, though I would never withdraw anything from mine, but in case of an emergency, you can withdraw your contributions only, penalty free. There are also exceptions to this for higher education, $10,000 for a first time home purchase, disability, back taxes, and other extreme life events. You only get penalized it you take out your tax free earnings (unless the exceptions), so using it as a savings account is a flexible option. Again, I love my money working for me, and the more money in there the more I’m making, so I don’t ever recommend taking any money out if you don’t have too. Higher compounding power = getting richer faster.
With a traditional IRA you can’t add any more contributions after you turn 70 1/2, but with a Roth you add to your nest egg forever if you want. Your Roth also has no minimum distributions at any age either, so you can live to 100, and never be forced to withdraw a dime. Keep adding forever and grow the account until you die for a huge legacy for the next generation! This is great if you have other retirement plans, or a pension, and you aren’t sure if you will ever need this money, but you want the tax free benefits just in case you do need your Roth money in your old age.
This tax free withdraw also goes for your heirs too. Since you already prepaid the taxes for them, the IRS stays away from the money for your kids and grandkids. They can have tax free money as an inheritance, or they can sit on the money and watch the eighth wonder of the world continue to compound, so they can have a huge retirement piggy bank, tax free! Did I mention I love the Roth yet?! There is nothing better then inheriting someone’s Roth.
Now, lets say you are a high earner (the number is always changing for what a high earner is), and the IRS won’t let you open a Roth IRA. Then you can open a traditional IRA, and pay the taxes later, or you can use the back door approach to get a Roth. You can convert a traditional into a Roth, but I would seek some tax help to make sure it is worth it. You will be paying the tax up front on the convert, and you want to crunch the numbers to make sure it is worth it. There are also some other complicated rules, so if you want to use the backdoor seek some advice first. The Roth is an option even for high earners though, so if you want one you can still get one. Many people have had success with this approach, or the just had old accounts from old jobs they rolled over into a Roth through this back door approach. No matter what, the Roth is for everybody, just do the research.
So, over time with most people the Roth IRA is you best bet for retirement. It is flexible, a great way to pay less taxes, leave a legacy to heirs tax free, and you are not forced to do anything with the money if you don’t need it. Roth’s rules are changing from the IRS all the time, so keep up with the latest, but overall it’s a great retirement tool, and my first choice to get a retirement plan together. Look into them if you don’t have one yet and if you are young, don’t wait!! Get one started today and reap the rewards of the extra time the money has to compound.