Jeff Rose, a fellow Personal Finance blogger, organized the Roth IRA Movement which consists of more than 140 bloggers and personal finance journalists joining forces by writing about Roth IRAs today.
One of my short term goals is to open an IRA account this year as another vehicle for retirement savings. One of the first decisions to be made is whether to open a Roth or traditional IRA account.
Don’t be embarrassed if you don’t know the difference between the two types of IRAs. I didn’t know until they offered the Roth version of the 401K at my office a few years ago. A Roth IRA means you’re contributions are after-tax instead of pre-tax.
It gets the name from Senator William Roth of Delaware who sponsored the Taxpayer Relief Act of 1997 which introduced this type of IRA. I was surprised to learn it had been around this long!
Benefits of Roth IRA
For me, the pros outweigh the cons when it comes to the Roth IRA. The only con I can see if that I will have paid income tax on contributions. But there are several benefits that have convinced me this is the way to go.
1. Tax-free Withdrawals – Since I paid tax going in, I don’t need to pay tax when I withdraw my contributions. Once I’m 59 1/2 (not that far off), there’s no tax on earnings either.
2. Diversification of Plan Types – I didn’t convert my 401 K to a Roth because we can sure use the tax-free advantage of my contributions. I figured our annual income will be much lower in retirement than now. I’m sure that when we start making withdrawals, it will be nice not to report some of the income as taxable.
3. Anytime Withdrawal – My second favorite thing about Roth IRAs is that you can withdraw your contributions anytime. Although it’s not good to plan for early withdrawal, it’s nice to know you can get your money without penalty if needed. You can even withdraw your earnings after the account has been open for five years without being docked.
The only thing I don’t like about the Roth IRA is also a problem with the traditional IRA. I can only contribute $6,000 per year. If we both open accounts, we can sock away twice as much.
I still need to figure out where to open my account and that’s proving to be an even tougher decision. There are so many options in the market. To help narrow it down, I’m evaluating the investment choices.
I’ll keep you posted as I continue moving forward with my plan to open a Roth IRA account. Have you made a decision about the Roth IRA?