The Roth IRA Movement

March 27, 2012 | Kate Horrell
Roth IRA

Source: goodfinancialcents.com via Jeff on Pinterest

Today is a special day, at least to financial geeks like me.  Today is the day that over 140 personal finance bloggers are getting together to publicize the value of Roth Individual Retirement Accounts (IRAs).  What ever would provoke us all to write about the same subject on the same day?  Wouldn’t that be silly?

It all started with Jeff.  My imaginary (which means internet) friend Jeff Rose.  Jeff and I have been working together for a couple of years.   He runs Good Financial Cents, a super-duper personal finance blog, and because of his experience in the military, he also has another blog called Soldier of Finance that talks about military specific issues.  Jeff even interviewed me for his Soldier of Finance blog.

Earlier this month, Jeff spoke to a group of 50-60 near-to-graduation college students.  During his presentation, he asked how many of them had heard of Roth IRAs.  And you know how many people raised their hand?

None.

This, my friends, is a problem.  The Roth IRA is arguably the best retirement savings product available today, and none of these college students had ever even heard of it!  Even if the Roth IRA wasn’t exactly right for them at this particular point, it is really concerning that they weren’t even aware that it existed.  And so a movement was born.  The Roth IRA Movement.

Jeff asked his PF friends if they would help spread the word about Roth IRAs, and over 140 people agreed to write about Roth IRAs today.  So, here we go.

I am smart enough to know when someone is smarter, funnier, or just plain cooler than me.  Kevin from Thousandaire is definitely one of those people, even if listening to him talk makes me tired..  And he did this fabulous piece about Roth IRAs:

I’m pretty sure that there isn’t anything else I can say about Roth IRAs that Kevin didn’t cover in his video.  In case you were overwhelmed, here’s a synopsis of the key points:

  • pay taxes on money when it is earned investment and earnings are tax-free at withdrawal
  • limits on contributions based upon income level
  • penalties for early withdrawal, though some exceptions do exist
  • set up through your choice of companies
  • unlimited investment options
  • fees vary by company and account
  • annual contributions capped at $5000 for 2008 ($6000 if age 50 or older)
  • may contribute until 15 April of the following year
  • no required distributions
  • non-working spouses may set up a spousal IRA
  • minimum contributions vary by company

Roth IRAs are pretty much awesome, but they are not for everyone (unless you are deployed to a tax-exempt combat zone.  Then they are for everyone.)  In a similar category of tax-advantaged accounts, you can also choose a traditional IRA or a Thrift Savings Plan (TSP) account.   Here are some question that you need to consider when choose a Roth IRA.

  •  Is your income likely to be higher or lower when you are taking money out of your IRA in retirement?
  • Is your current income subject to federal income tax, or are you below the level of income to pay federal taxes?
  • Would a traditional IRA be deductible, based on your income level?
  • If you have limited investing funds, is TSP a better choice for you?

Here’s the hard part:  starting.  Better to pick a less-good option (between tradition IRAs, Roth IRAs, and TSP) than to do nothing at all.  If all these decisions make you crazy, throw a dart, hit the Roth IRA, and start one.  Just do it!

P.S.  Don’t forget that the Roth TSP option is coming soon!

Comments

  1. guest says:

    when the Roth TSP is set up, will one be able to contribute to it AND do the 10k IRA each year (5k husband 5k wife)?

  2. Tay says:

    I think this is all great information that you are posting on your blog. I don’t have the statistics but I bet the majority of soldiers and half the officers don’t know how to prepare for retirement. More information on the TSP and the Roth TSP when it comes out needs to be pushed down to servicemembers in the simplest of terms. I still don’t understand the TSP so I invest in Roth IRAs with my bank. Please keep providing great information I will be sending you more traffic.

  3. William says:

    Something I've never seen explained: Why is it better to pay taxes NOW on an IRA, rather than when you draw on it? In a 401k, you get the whole amount, and pay taxes on withdrawal, when you presumably are in a lower bracket, whereas a Roth charges the interest up front, reducing the amount carried forward, thus loading up your tax debt NOW in order to reduce it at retirement. I hear "Roths are great", but I never hear WHY this is better than the 401k.
    What logic am I missing hre?

    • guest says:

      William, if you are an ardent saver, more than likely your tax load in retirement won't be lower, so say you save a half a million dollars, with a 4% withdrawal rate that's 20k, plus add in your retirement pension and any SS (both of which are taxable as well). So if you are single that will more than likely put you above the 35k minimum that would put you in the 25% tax bracket.

      If you had that half a million in a Roth the withdrawal isn't subjected to taxes so you would be in the 10-15% bracket.

      In addition, with the budget being what it is, the likelihood of tax rates going up in the future years is VERY high. So if you pay taxes now at a 25% rate, and in the future taxes brackets narrow and rates go up you have already paid them.

      Lastly, if you are deployed and invest in the Roth, you are essentially NEVER paying taxes on the money you put in or take out since you would be covered under the combat zone tax exclusion.

    • Gina says:

      I am a tax preparer and still feel that the traditional IRAs should be maxed out first. Many people can still contribute to an IRA and get the tax benefits now, like the 401k plans. If your income is over the limit for the tax deduction then you should invest in the ROTH IRA. My belief is that you never pay taxes before you have to. The people who are pushing the ROTH IRAs since the beginning are the IRS and the people making the commissions on them. Who do you trust?

    • Richard says:

      The benefit is in the beginning; you only put 5000 per year. Say you do this for 20 yrs you pay taxes only towards the 100k. However, it stays in for 10 more yrs, accumulates 1million over its lifetime. When you cash out, you pay 0 taxes. If it was not a Roth you would loose 100-300k to taxes. For the roth, you paid 10-30k. The benefit isapproximately 200k.

  4. G.Braden says:

    A typical family of 4 can earn over $50k and pay no federal income taxes. That covers over half of all Americans. The Roth is done with after tax dollars and then all gains from years of growth plus the original contributions are withdrawn tax free. When you retire not only do you pay taxes on other earnings YOU ALSO PAY TAXES ON YOUR SOCIAL SECURITY PAYMENTS IF YOUR OTHER INCOME IS ABOVE A CERTAIN LEVEL only $25,000 or more. When you die your children can inherit a Roth Ira tax free and then take tax free distributions for their lifetimes also. The promised Roth TSP is questionable since it is authorized by the Bush 2006 tax cuts that were supposed to expire in 2010 but were extended until the end of 2012 so how do you do a Roth TSP when no other version of 401k will be allowed. The clients of the tax preparer that says a traditional IRA is better have my sympathy. I do financial/retirement planning as a profession so aam concerned by many of the earlier comments.

  5. eae says:

    The interest is also not taxed

  6. Watson says:

    Great post Kate I just started blogging about military finance and mentioning the Roth was one of my first posts. Soldiers need to invest in a retirement account because you never know what could happen. Only a few actually retire from the military. I love my Roth IRA tax free interest is awesome.