Roth IRA questions?

[hsmama]

I am unsure of where to post this- I was informed by a friend that the best place to stash any money we have saved (if we want safety,not worrying as much about growth) is a Roth Ira. I had previously thought this was only for withdrawal after age 59 (I'm 41) but he assured me I could withdraw anytime without a penalty,and still make use of the non tax status of my savings. Right now,it's just some extra in a savings acct,most of which we wouldn't touch day to day,but I would worry about the need arising,if a Roth doesn't allow withdrawals without penalty. He basically said we could use this like a savings,(emergency fund)and not pay penalties. Am I missing something? advice appreciated.

[MonkeyMama]

Money that you contribute to a ROTH, can be withdrawn at any time, without penalty. It is the earnings that it makes, that can not be withdrawn without taxes or penalty. My caveat is that these are current rules, and can change at some point. The ROTH rules can be pretty complex.

I actually keep some emergency savings in my own ROTH. The kind I doubt I would ever touch, but is still accessible "just in case." I have invested it in CDs, money market accounts, and MM Mutual Funds (all cash accounts, to preserve the principal). There is a big myth out there that you can only invest IRAs in stocks and bonds.

My caveats are that you need to understand the ROTH rules and keep on top of changing tax laws. I only recommend this strategy if you already are putting enough away for retirement. Or if you are just starting out and want a little more of an emergency cushion.

Your friend is right, overall.

[hsmama]

thanks! so I guess it would work out for what I'm thinking- should I just check with my local bank to open one,or is there a preferred way to open one?

[ea1776]

Originally Posted by hsmama

thanks! so I guess it would work out for what I'm thinking- should I just check with my local bank to open one,or is there a preferred way to open one?

You can open a Roth IRA type of account just about anywhere. I avoid my local bank because it keeps your options low and/or expensive. For example, many local banks in my area charge big commisions and make it hard to buy mutual fund XYZ.

I guess it depends what you are going to buy in the Roth Account? If you are going to want to buy individual stocks, I would go with TD Ameritrade or Scottrade. Those will work well with CDs and bonds also. Vanguard is good if you just want a lot of diversification and very low costs. T Rowe Price is good if you don't have a lot of starting capital, b/c they let you invest for just $50/month.

Keep in mind also that you can have multiple Roth accounts. The only place your limited is how much total you can contribute to Roth account(s) per year.

The Roth vs. 401(k) (traditional IRA is similar to 401(k) for tax rules) argument to me boils down to 3 things:

1. What tax bracket are you in now?
2. What tax bracket do you realistically expect to be in during retirement age (~60 for tax purposes).
3. Do you expect our government to increase/decrease taxes over time?

Here are the corresponding thoughts:

1. Generally, if you are in a higher tax bracket, its smart to use traditional IRA or 401(k) to shelter some of your income from the higher tax rate. If you are in a lower tax bracket, then Roth all the way and there's no better option IMO.

2. If you expect to be in a high or higher tax bracket at retirement, then the Roth wins again.

3. If you expect the government to increase taxes over time, then the Roth wins again, since it is sheltered from income tax at the time of withdrawal.

[gertymac]

JD over at Get Rich Slowly has a lot of information on Roth IRAs. I recommend reading his stuff before opening one.

Don't have enough posts to give you a link yet. Sorry!