Tips for Making Money: Why a Roth IRA Makes Sense Right Now

The world today is all about instant gratification. We have to be constantly entertained television, music, twitter the buzz is never ending. Between work, school, kids, wives, husbands, commuting, and so much more it can be hard to step back and see the bigger picture. It is for this reason that many people are not making the most out of their financial investments. When it comes to money, there is no area of our lives where we seek more immediate satisfaction. We want to make tons of money and we want to do it as quickly as possible.

While this notion is certainly desirable, in most cases it is simply not practical or realistic. In the grand scheme of things, only a very small portion of the population has successfully “struck gold” at a young age. Learning to accept that, for the most part, wealth comes with time is the first step to really making the most of your financial investments. While Steve has touched on this subject in the past, I would like to propose that today’s poor economic climate makes a Roth IRA one of the best options you have to maximize your payout in the long run.

To give it to you bluntly, a Roth IRA is not going to make you rich quick. It’s just not going to happen. Starting a Roth IRA (Individual Retirement Account), however, is one of the smartest moves you can make (especially if you are able to do so at a young age). With a Roth IRA, an individual contributes money to an account and that money is locked in to this account until you are of retirement age. While you will not be able to access the money you have invested until you are over the age of 59, the money does grow tax-free and at a high interest rate. So, rather than have money sit in a savings account with (outrageously) low interest rates, opening a Roth IRA allows investments to earn significantly more.

There are a few restrictions associated with opening a Roth IRA. Not everyone qualifies. If your tax filing status is single and you make more than $95,000 a year, your contributions are restricted. If you are married and your household income is more than $150,000, your contributions are also limited. Otherwise, an individual who is under the age of 50 must contribute at least $5000 dollars and an individual over the age of 50 must contribute at least $6000 in order to open a Roth IRA. Roth IRA’s encourage people to save money for when they are no longer working, by offering them a significant tax break. Without access to the money, there is no temptation to use it on frivolous expenses. The money will accumulate and set you up to be in a great financial position when you are older.

The biggest problem that people (especially younger people) have with money is saving it. Living in a fast paced world where extravagance is celebrated, does not translate well to saving and investing money for a long term payout. A Roth IRA is a great option for today’s economic climate because bank interest rates are at such an all time low. Moreover, the Roth IRA forces an individual to give up the “satisfaction now” mindset and encourages them to work towards their future.

This guest contribution was submitted by Pamelia Brown, who specializes in writing about associates degree. Questions and comments can be sent to: pamelia.brown@gmail.com.

Photo courtesy of taxfix.co.uk

http://www.senseofthefather.com Jason

I agree wholeheartedly that the Roth IRA is one of the best savings vehicles available right now. It should be noted that the Roth contributions are done after you have paid tax on the money, so you are not subject to higher tax rates in retirement. You can also withdraw your direct contributions at any time without penalty (you are only required to leave gains and rollover amounts in to avoid tax hits). I have also found it awesome that both I and my spouse can contribute $5000 per year. My only real concern is the possibility (likelihood) that our government will change the rules before I retire and I’ll have lost out on the tax benefit by not using the traditional IRA.

Good post!
Big-D

I have a roth, I like it because it grows tax free, however there is one large con you don’t necessarily talk about. You have to be 59.5 to get at the money. While I know this is the whole point, that this is for retirement, but define retirement? I hope to at 40 start my own company and that would be nice to help me start up my company and I am retired from a corporate job. Also what about your life expectancy? According to the government you have xyz to live but if you have a heart condition, you have the same life expectancy as the grandma with zero health problems. This also hinders your distributions as you don’t just get the money tax free, it has distribution timeframes, etc.

I am just saying that there are situations that come that make this not as desirble as “everyone has to have it”. I have one, and have 200k in mine. But I am not putting another cent in it as I don’t have the life expectancy to hit 60 and taking it out early is too costly. I want to start up my own company, and every dollar counts here and now.
Max

@ Author -

While I agree that the Roth IRA (or Roth 401K) is a great retirement savings tool, I myself opened one when I was 18, I think you fail to really illustrate “Why a Roth IRA makes sense right now.” The major advantage of a Roth is that it uses after tax contributions and thus when you withdraw your savings+earnings in retirement you will not have to pay federal income taxes. Your money grows tax free in all retirement accounts, except in a traditional IRA or 401K you will then owe taxes when its time to withdraw funds. Also, a Roth makes sense right now, because tax rates are low. With the current US debt situation I do not see anywhere for taxes to go but up. Lastly, I do not believe your description of the restrictions is accurtate as a Roth IRA has an annual contribution limit of $5,000 for those under 50 and $6,000 for those over. You can open an account with some companies for as little as $100. This annual contribution restriction is why a Roth cannot make you rich quick because you can only invest so much tax free each year.

You make the thesis of your article this, “that today’s poor economic climate makes a Roth IRA one of the best options you have to maximize your payout in the long run.” However, you don’t really say why the fact that the economy is poor makes it one of the best options, such as the fact that taxes are likely to increase. In fact I might argue that, sans the fact that I think taxes are increasing, in a poor economic climate the retirement saver would prefer a tax deferred retirement account which would lower their tax burden. So while I agree with the title of your article, get all your facts straight and provide a real arguement for “Why a Roth IRA makes sense right now.”

@ D-big -

I am pretty sure your contributions, but NOT investment earnings, can be withdrawn at anytime, tax free and without penalty. So if your account has $200K and you contributed $75K then you would be able to withdraw the $75K today. So you might want to check that out.
Big-D

@Max – To my understanding – that is a rollover IRA, and not a Roth IRA. I can look more into it – and I have looked at the federal distributions which can occur as well – but it has to do with guidelines for life expectancy. So if at 45 you wanted to take out money they would say you can have 1/35th of the money since your life expectancy is 35 more years to 80.

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