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6 Reasons Why the Roth IRA Rocks

Exactly 6 months after I made my first contribution, I maxed out my Roth IRA for 2010, meeting one of my new financial goals for this year.  That makes 5 full years of maxing out, or $23,000 worth of contributions.  Of course this $23,000 will grow to $9,490,308,898 by the time I retire, right? Right?

All jokes aside, I am glad this is done. I want to give an anonymous shout-out to my middle-school science teacher, “Mr. Rob,” who explained to me both the concept of the Roth IRA and the mechanics of opening an account online over a meal of chicken salad at Appleby’s.  A more financially educational meal I’ve never had.  It’s funny, the most valuable things I’ve learned from teachers, I learned them outside of the classroom.  Thanks, Mr. Rob.

Qualified distributions and capital gains are tax-free

You put after-tax money into the Roth IRA, and then your money can grow tax-free. Qualified withdrawals are also tax-free. We don’t know what the federal tax rate will be in the future, but having a source of tax-free earnings can never hurt. Many people have traditional 401Ks (which are funded with pre-tax dollars and thus will be taxed when you withdraw in retirement), so having a Roth provides important tax diversification.

Available to all with earned income (i.e. not employer-sponsored)

You can start a Roth IRA as long as you have earned income. In other words, this option, unlike the 401K, is not dependent on employer sponsorship.  I didn’t have a 401K for 2008 and part of 2009, but I can save via Roth IRA. If parents want to encourage their teenager to save, this is also an excellent method. A 16-year-old who earns $2,000 babysitting in a year can contribute all of that $2,000 to the Roth. For added incentive, parents might provide matching funds,(say, 50 cents for every dollar saved.)

Spousal IRAs: because nonworking parents need to save too

Stay-at-home parents (SAHP) takes care of the family, but the Roth IRA gives them a way to take care of their retirement needs too. Tax law allows a working spouse to contribute $5,000 a year (the current federal IRA limit) to an IRA in the stay-at-home parent’s name, even though the SAHP may not have earned income. If you are a SAHP, insist on having a Spousal IRA set up for you so that you have a way to access tax-advantaged savings in your name.

Penalty-free withdrawal of contributions

You can withdraw your contributions (not gains) at anytime, penalty free. Ideally, you should leave your retirement bucks to work for you as long as possible, but in a pinch, money in the Roth IRA can also double as an emergency fund or a down payment.

Variety of investment options

Think of the Roth IRA as a basket, and specific investments (stocks, mutual funds, bonds, etc.) as eggs that you put in the basket. With so many firms offering Roth IRA services, it’s easy to select one that works for you. Those who wishes to invest in low-cost index funds can choose Vanguard, Fidelity, or Charles Schwab. If you want to select your own stock, brokers include Etrade and Scottrade. Many banks and investment firms also have Roth IRA options. Your 401K might be dependent on the investment choices your employer provides, but no such limitations exist with the Roth IRA.

Catch-up provision for older workers

If you are 50 or older, you can contribute an additional $1,000 in 2010. So, a 55-year-old worker can contribute a total of $6,000 in the Roth IRA. The catch-up contributions feature is a great way to accelerate savings before the retirement years.

A version of this article first appeared in BlogHer.

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