Saturday, February 15, 2014

Advantages of a Roth IRA Account

I have only recently started contributing to a Roth IRA account for a number of different reasons. I make slightly less than $100,000 per year and thus it's legal and I am allowed by law to contribute the full $5,000 max per year to my Roth IRA account. One of the critical reasons I have chosen this type of IRA, after proving its efficiency by using an online Roth IRA calculator, is because the $5,000 per year I will be contributing is not tax deductable. I know what you’re thinking, “He’s saying not tax deductable is a good thing?”. But for certain circumstances it is actually a good thing. Think of this for example:

$5k contributed to a traditional IRA will be tax deductable and thus not have been taxed at time of contribution. So that $5k out of your pocket is really only worth about $4k after taxes. On the other hand, $5k in a Roth IRA account has already been taxed and is thus worth the full $5k.

Another reason I am using the Roth IRA account is that I am young, and am thus more likely to have emergencies that I didn’t plan for (ie. new roof, change jobs and need to move, etc.). Thus I will be allowed to withdraw any contributions I have made to the Roth IRA after 5 years with no penalties or taxation. Say I contribute $15k in 3 years and then stop contributing. after 5 years I can withdraw my $15k and just leave the earnings in the account to grow until retirement. By doing this I have essentially lent myself the $15k and after 5 years I get it back to spend on a new home or whatever I’d like. Then I would still be earning from the investment returns on the funds left in the account.

As I mentioned at the outset, there are a number of IRA types that may suit your needs better than the Roth, so I strongly recommend contacting a financial institution that will be able to give you all the options.

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