Why You Should Have a Roth IRA Account

Given all the news regarding the banking industry, Wall Street and the big bonus scandal, I want to start off this article by stating that my opinions regarding Roth IRAs are completely unbiased.

And personal.

I am NOT in the investment field (thank goodness).

Whether or not you take my advice or not is a personal matter for you. And I am sharing these views strictly to educate people about available options regarding their retirement accounts.

As always, you should seek the advice of a tax professional and/or an investment professional before making any decisions with your money.

Whew! Sorry for that, but I had to get that out of the way.

Okay, here we go...

Retirement Plans and 401ks

Here is a little something you may not know regarding 401k retirement plans. Bear with me as we take a short detour down this road before address Roth IRAs specifically.

See, I have to discuss 401ks because of my wife. Or rather, because of the "advice" she hears from people on a regular basis.

My wife has a full time job. That means steady pay and a retirement plan. In her case, that is a company sponsored 401k plan.

I am self employed, and have been since 2004. So the retirement "plan" I have is partly my business, and partly the money I put away into IRAs.

Now, the reason I had to detour into a brief discussion regarding 401ks is because of a very prevalent (and dangerous) MYTH that is floating around "out there." Which is...

"You should always max out your 401k before investing into any other retirement plan."

I added the bold in the quote to make a point.

Which is, you should only contribute enough money into a 401k plan to maximize any matching funds (or stock) provided by your employer.

In my wife's case, that means 3%.

Now, why make that point. Well, over the past 7 years the company she works for bought out a competitor. And then they were bought out.

Which means, over the past 7 years her 401k has changed.

Since I manage all this stuff for the family, I know the difference, even if she and her coworkers do not.

We've gone through 3 different 401k plans. And the fund lineup inside the plans have changed 5 times in those 7 years.

Funds I did really well with are gone. It seems that the best funds always get axed, and some junk gets offered to us in the 401k plan instead.

The fund lineup went from well over a hundred funds to 12.

That's right, 12. Twelve mediocre funds in her 401k.

So when my wife tells me that someone "suggested" she contribute more to her 401k, I have to spend an hour telling her all this stuff. Then she calms down and says "well, why did so and so tell me this?"

Like I know...

Now, if you ask me, locking up your money in a plan you don't control doesn't leave you with a whole lot of choice.

And that's why you should never "max out" your 401k beyond what you need to maximize any matching funds your employer MAY be giving you.

Because tying up ALL your retirement money into ONE plan limits your control. And your options. If you don't think that is such a big deal, go ask the folks who used to work for Enron.

Which brings me to another point. It seems that more and more companies are getting rid of matching funds. If that's the case with your company, you better think twice about putting money into their 401k plan entirely.

Ok, so why am I focusing on a Roth IRA in this article.

Well, that's because most people don't know about one little understood rule, which is...

Roth IRA Contributions Explained...

Here's where we have to talk about taxation a bit.

The rules change a lot, and I am NOT a CPA, so don't hold my feet to the fire if I mess up a couple of small details.

Again, I'm just trying to get you thinking is all.

Here's how taxation and retirement plans basically work:

1. IF you put money into a plan that was never taxed (i.e. your contributions are pre-tax dollars), then you have to pay tax when you pull the money out of the plan in retirement... or when you pass that money along to you kids, or grandkids.
2. IF you put money into an IRA after it was taxed (i.e. your contributions are post-tax dollars) you EITHER pay tax on the investment gains only, or you don't have to pay a dime in taxes at all.

Now, getting into all the nitty-gritty regarding #2 might take WAY too much time to really do that topic justice.

So here is the quick and dirty.

Roth IRAs are an investment of your post-tax dollars. Which means you get no deduction for contributing to them now.

No writeoffs. No benefit to you today at all. Period. End of story.

But here's the really cool part.

When (or IF) you decided to take out the money later in life, say after you retire, OR if you decide to leave the whole amount to your kids or grandkids (or whoever), you will not have to pay a dime in taxes.

Ever.

In fact, regular IRAs make you take money out after you reach 70 and a half years old (my dad starting taking money out this year).

Roth IRAs don't have that provision. Which means, you can leave the money in there for as long as you like.

And your kids can leave the money in there as long as THEY like.

You are never forced to take out a penny. And when you do, you don't pay a penny in taxes.

How cool is that!

So what's the catch?

Great question. First, you can't stuff as much money in there as you would like. There are caps as to how much you can contribute each year.

And if you earn more than the contribution limit allows, you can't even open up an account.

There is a way around it for self-employed people, and that's by setting up a Roth 401k... but that's another story.

So, the bottom-line is this:

1. if you make too money you can't have one
2. you can only contribute so much money into a Roth IRA each year.

But since you can choose any darned funds you want (or whatever), you might want to look into a Roth IRA.

Thanks for reading the hub. If you have any comments or questions just let me know.

Oh, one last point. My friend runs a retirement plan firm here in Connecticut. He's an honest guy, has no idea I wrote this article, but I'm going to give you a link to his website.

If your business has a 401k or needs one and you are in Connecticut or the New York city area, why not stop by his site.

He's one of the good guys.

And if you've been reading the news or watching TV over the past 6 months or so, you know how rare that is.

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