Should You Open a Roth IRA?

by AJ Pettersen · 5 comments

Retirement Road Sign

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?

Options

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.

Advantages

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 They are especially favorable for younger people, because they are post-tax investments that are withdrawn tax free.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.

Disadvantages

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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{ 5 comments… read them below or add one }

Grayson @ Debt Roundup January 23, 2013 at 10:12 am

I opened a Roth as an additional means of investing and I like it. I am going to be moving it to Vanguard soon, but I don’t see any problems with doing so. A Roth is easy to setup and easy to contribute to.

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James Salmons January 24, 2013 at 10:08 am

The tax advantage of the Roth IRA are great and often thought of as its greatest advantage, but the option of taking out your deposits without penalty (not the income but the investment amounts) is extremely valuable.

This makes it a tax free way of investing and saving that can be used for many purposes. For example, many of the educational savings plans are proving to be questionable depending on what state you live in. But you can stay in control of your Roth IRA investments to improve its reliability.

I have used it myself and consider it the best retirement investment option for most people, especially because of its flexibility.

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Garrett Smith January 24, 2013 at 1:19 pm

The contribution limits for a Roth IRA are now higher for 2013. It’s $5,500, and $6,500 if you are 50 or older.

I agree that it is a great investment. Who knows what the tax rates will be down the road when someone retires? Taxes could possibly be much higher, with the Federal deficit as large as it is. With the Roth IRA, you don’t have to worry about it.

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Robert January 26, 2013 at 5:14 pm

My wife and I have Roth IRA’s with Fidelity. Fidelity’s website will tell you that there is a minimum to open an account, but Fidelity will waive that if you plan to reach that minimum in a reasonable amount of time or if you auto-debit each month into the Roth. I use that option now to fund my Traditional IRA. We are over 50 and in a higher tax bracket now than we expect at retirement age (10 years), so the traditional IRA tax breaks are better for us now. We choose our own funds and use the Fidelity Monitor & Insight newsletter for research. Expensive, but worth it. I am sure that Vanguard has similar funds and research available as well, but we started with Fidelity 20 years ago and have always been satisfied.

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Joe February 10, 2013 at 5:32 pm

Informative article! One correction – Roth CONtributions can always be withdrawn penalty free, it’s the DIStributions that will incur a penalty if you withdraw them before age 59 1/2.

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