Why a Roth IRA?

[billybob]

Can someone explain to me why I need a Roth IRA in addition to the 10% I am currently contributing to my 401k plan?

Should I reduce my 401k contributions to, say, 6% and put the rest in a Roth IRA?

If so, why?

Thanks!

[sweeps]

Re: Why a Roth IRA?

One advantage of contributing some of your retirement money to a Roth is that you are hedging your bet on taxes. Some people predict that tax rates will have to rise over the next 20 or 30 years (due to the federal deficit, etc.). If that's true, it will be better to pay taxes on the money now, and withdraw your earnings tax-free at retirement.

A 2nd advantage is that IRAs give you a much broader choice of investments than your company's 401k plan.

A 3rd advantage is that you can withdraw your contributions at any time. (This can be a bad thing though, since you really shouldn't tap into your retirement funds except in true emergencies.)

Having said that, I think people are a little too crazed about the Roth. Funding your Roth is not nearly as easy as funding your 401k since you (and not your employer) does the work. Also the guess on whether taxes will be higher in the future is purely a guess. They could be the same or they could be lower, who knows. Also for someone who is in their peak earning years, paying taxes later will probably be a better choice.

If you're putting as much as you can in your 401k, and are invested in a diversified portfolio, go with it and don't overstress about it.

[Ima saver]

Re: Why a Roth IRA?

I would open up a no load index fund and put part of my money into a roth ira. It is really easy to do and you can withdraw the money tax free when you retire.

[Fern]

Re: Why a Roth IRA?

I would continue to contribute at least the minimum needed to get any company match on the money in your 401k...that's something the IRA can't give you. Both the IRA and 401k are tax-deferred vehicles, so either one is good, i think, altho as sweeps said, one advantage of the IRA is that you have much more choice about where to invest the money, whereas at work you are limited by your company's menu of choices.

[billybob]

Re: Why a Roth IRA?

where should i go to open a Roth IRA? Which is the best option? is there a minimum investment to get started?

[Ima saver]

Re: Why a Roth IRA?

I would suggest that you open an IRA with a bank until you get the minimum to open a roth IRA with a mutual fund. I would suggest Vanguard Index 500 which has a minimum of $3000 to open it.

[Fern]

Re: Why a Roth IRA?

A Roth IRA is only the vehicle you use to make your investment. The actual investment could be something as simple as a bank CD, a mutual fund, an annuity or stocks. It depends on your tolerance for risk. A good bet would a stock oriented mutual fund with a well-known, no load fund family such as T rowe Price, Fidelity or Vanguard. (Be careful with Fideltiy as not all their funds are no load.) Index funds are fine if you want a broad stock basket of large cap stocks.

[CJsoccerchic]

Re: Why a Roth IRA?

So a traditional IRA is pre-tax savings and then after a certain age, you have to pay taxes on the money you put in when you were younger as well as the interest that it has earned?

[sweeps]

Re: Why a Roth IRA?

So a traditional IRA is pre-tax savings and then after a certain age, you have to pay taxes on the money you put in when you were younger as well as the interest that it has earned?

Maybe an example would be helpful. Let's say you have $1,000 of pre-tax money to contribute, and let's say it will grow to 10 times that by the time you're ready to take it out. Let's also assume your effective tax rate is 20% both now and in the future.

In a 401k or traditional IRA, your money goes in untaxed so you deposit the full $1,000. It grows to $10,000. Then you withdraw it, paying $2,000 in taxes, for a net return of $8,000.

In a Roth IRA, you're taxed up front, so you deposit $800. It grows to $8,000. You can withdraw that amount without paying tax on it.

[CJsoccerchic]

Re: Why a Roth IRA?

So either is fine and in the end either one will yield you the same amount of money... Which on would you prefer sweeps?

[sweeps]

Re: Why a Roth IRA?

Personally I put everything in my 401k. It's convenient and I like the investments my employer offers.

However, I think the ideal scenario is to contribute some to your 401k (or traditional IRA) and some to your Roth. The reason is tax diversification. You don't have to make any guesses about what your tax situation will be in the future. You've hedged your bets either way.

Also you get more flexibility when it comes time to withdraw. For example at 60 you may be better off withdrawing from your Roth and holding off until 70 to start withdrawing from your 401k, or vice versa.

[SuzeOFan]

Re: Why a Roth IRA?

I'm with Ima Saver.

There are so many plusses to a Roth it's hard to know where to begin.
But the key is to BEGIN one now asap! It's really a no-brainer. Your still young. Even if you only contributed $4000 now to your Roth and that was it. You'd still have quite the sizable pot when you turn 59!

Right now, the limited contribution is $4000/year. (That's roughly $333/mo. if you want to max it. With what you make a year, and being single, you shouldn't have much difficulty in socking away that kind of money. AND since you are interested in buying a home someday, there is a first-time homebuyer allowance built into it.

Read what Suze Orman has to say about Roths at Yahoo Finance.
Her advice has changed my life.

Her advice: "It's just plain nuts to not take advantage of a Roth IRA."

401Ks are just ok. And then - only if your employer is matching your contribution. 401Ks are only tax differed. That means Uncle Sam's gonna hit you with his best shot later when you want to take it out. The big difference between them is the Roth is TAX FREE upon withdrawl.

The future of taxes? Does anyone really believe that given the war, the trade deficit, social security and medicare running out etc. etc. ....that there's a chance congress will ever lower taxes? On the contrary. You can bet your bottom dollar taxes will not only go up... but these will look like the good ol days....!

The more you learn about the Roth IRA the more you will love it.

And when you marry someday, you and your spouse will be able to contribute a total of 8,000/year until 2008 when it goes up to $5000 apeice.

New Flash: The Roth IRA may only be available until 2010 when it's up for a revote before congress. That is why so many companies are hesitant to offer the Roth 401K to their employees. The future is uncertain.

I personally like Vanguard. They want $3000 to open a Roth Index Fund.
(I chose a REIT Index Fund, but wished I had started sooner!) And they only charge $10/year if your fund carries a balance of less than $5000.

My Advice: Start your Roth today! You won't regret it.


The Roth IRA: As Close to Perfect as You Can Get

A Suze Orman exclusivehttp://biz.yahoo.com/pfg/e28socsec/art021.html

[sweeps]

Re: Why a Roth IRA?

I think people are a little too crazed about the Roth.

I rest my case.

[Ima saver]

Re: Why a Roth IRA?

Good advice, suze and now I know where you got your name!!

[sweeps]

Re: Why a Roth IRA?

Suze Orman and other financial "gurus" do people a major disservice by selling people their one-size-fits-all advice. Please do not take their advice as gospel. Everyone's situation is different.