The Roth IRA Movement

Roth IRA

Source: 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?


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!

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.

6 Comments on "The Roth IRA Movement"

  1. 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. 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. 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?

  4. 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. The interest is also not taxed

  6. 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.

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