Investing for the future is important. While retirement may be a long way off, it’s always a good idea to begin saving early. My wife and I are beginning to take steps to invest for our future. We have paid down our student loans significantly and now have more money to put aside for the years ahead. We are considering a few retirement investment options and one of them is a Roth IRA.
Is a Roth IRA right for you?
Depending on how much money you have to invest and how you want to allocate those funds, you have a number of different choices. My wife and I are leaning towards investing on our own due to the ease of use online and lower fees. If you choose this route, you’ll need to evaluate the pros and cons of each company. Some offer no maintenance fees, while some require a minimum balance; some offer a certain number of free trades, while others offer low expense ratios.
A Roth IRA can be opened in any number of locations, and many workplaces give this as a retirement portfolio option. Financial advisers may help you open one, or you can start your own online. If you choose to invest with an adviser, you need to be sure you know how much you’re paying and what services are provided.
Roth IRAs offer a number of advantages to those saving for the future. They are especially favorable for younger people, because they are post-tax investments that are withdrawn tax free. This means that after the age of 59.5, you’ll be able to draw from your Roth IRA without paying tax on it. Assuming that you’re going to be in a higher tax bracket when you’re older, this is a great benefit that allows your account to grow tax free.
Because they’ve already been taxed, the contributions to a Roth IRA can be taken out at any time (with penalty fees). You won’t have to pay fees if it’s for a qualifying reason — such as, after five years of contributions, buying your first house.
Roth IRAs carry a distinct set of downfalls, as well. You can only contribute up to $5,000 per year until you’re 50, and $6,000 per year after that. If you earned more than $125,000 as an individual or $183,000 as a married couple in 2012, you’re ineligible to contribute to a Roth. This means that your current holdings would be sitting until you retired or decided to move the money. And, as mentioned above, there are penalties for early withdrawals.
The Bottom Line
The tax advantages offered by a Roth IRA are great in most circumstances. If you end up in a lower tax bracket when you retire, then you’ll lose that advantage. Of course, predicting future tax law is quite difficult.
Roth IRAs are excellent investment strategies for a large set of people. If you’re within the income limits and have money to put into a retirement account, a Roth IRA is a good choice.
What’s your experience with Roth IRAs?
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