Since I first started investing when I graduated high school about 12 years ago, one of the first things I did was open a Roth IRA. The primary decision was that I paid taxes on contributions today and would not have to pay taxes at the time of withdrawal in retirement 40 to 50 years down that road. As income taxes are more likely to go up, instead of down, to offset the ameliorating federal deficit, this decision seemed like a no-brainer.
Despite reading other blogs & listening to some local investment advisers that might say a Roth isn't always the best retirement savings plan, I still have no hesitation with my decision. I must confess I have one regret that I will get to.
One advantage of a Roth IRA is that you can buy individual stocks. I use Motley Fool Stock Advisor to make educated and successful stock picks so I can reach my retirement goals.
Pre-Tax vs. After-Tax Roth Contributions
The financial experts primarily recommend to only choose a Roth if you expect to be in a higher income tax bracket in retirement than when the contribution is made. If you expect to be in the same tax bracket, you essentially break even. And, if you plan to be in a lower tax bracket, a traditional account will yield more money.
My opinion…I've run the various comparison calculators and there are times when Traditional does make sense, but, when I am retired I do not want to calculate taxes. I do not want to pay a tax preparer to calculate my tax burden. At that point, I will feel taxed enough (I already feel that way). Having a Roth means I paid my dues to Uncle Sam already and I can spend my withdrawals as I please without passing through his hands first.
Don't get me wrong as I contributed to a pre-tax 401k with my former employer. Choosing a Traditional Pre-tax IRA or after-tax Roth IRA are both better retirement options than keeping the money in a good ol' taxable brokerage account. Either way, you only pay taxes once. I like paying my bills sooner instead of later. I feel the same way about taxes. I do not want to be surprised in retirement when I wait to see how much the tax bill might have grown over several decades.
Roth IRA Contribution Limits
In 2018, the contribution limits to Roth and Traditional IRAs is $5,500 each. As my wife & I are self-employed, we do not have the luxury of contributing to a 401k with an employer match like I did for the past 7 years. My preference is still to max out the Roth IRA and put the excess in a traditional account.
Traditional IRA contributions are tax-deductible and I might be willing to contribute more if it keeps me from having to “pay in,” but overall I insist on paying the bill today instead of tomorrow.
What if Roth IRA withdrawals become taxable?
I will admit that I have a small concern that Roth IRA withdrawals will be taxed in the future to address budget shortfalls. If that's the case, it would have been better to have gone with a Traditional IRA in the first place. With anything in life, there is an element of risk.
I certainly hope our lawmakers will not decide to tap Roth IRA contributions to pay the electric bill for Capitol Hill, but, I wouldn't put it past them. The thing is, tax-advantaged IRAs are a great way to entice regular Americans to put money into the stock market. Of course, if Roth contributions become taxable upon withdrawal, there will be larger problems to deal with than being taxed a second time.
My One Regret…
I mentioned earlier that I have one regret with Roth IRAs. It's that I haven't contributed enough to them. I have yet to max one out each year. A few years ago I could have, but I used the money to pay off student loans and a car loan or to save for the future. I was also a little skittish because of all the ups and downs in the market.
Even Dave Ramsey recommends to pay off debt and save for retirement at the same time as he has met several people that retired debt-free but didn't have anything in the bank put away for retirement. I might not have managed my money the best during my 20s as some of my peers, but I enjoy reading personal finance blogs to get ideas.
I must confess that I also have one small, quasi-regret. A year ago, I thought a Roth IRA was the best option to save for retirement. I have read how one or two people are paying the penalty and switching their IRA contributions to other investment vehicles because of a better return rate, even after the withdrawal penalty. Honestly, that is a lot of complicated math for a poli sci major, so this is another reason I am still very loyal to my Roth.
Paying For College
I haven't thought of this “positive” until I read an article or two the other week related to college savings accounts. Apparently, Roths can be withdrawn penalty-free for qualified college expenses. I'm sure not 100% gung-ho on this payment strategy, this is my “no-touch” retirement account, and I still fear I might overextend myself paying for junior's education out of the retirement nest egg.
On the flipside, if I contribute to a 529 and they go unused, then planning to pay for college from the Roth is a better option. The money can still grow tax-free until retirement. While a Roth can be a great secondary option to pay for college, I still believe a 529 or Coverdell education savings account (aka “Education IRA”) are the best primary savings account.
It's Never Too Late To Start
You might be 20 years old or you might be a 20-year-old in a 35-year-old body. The point is you can never start saving for retirement too soon.
If you are hesitant about investing, Betterment.com is a great investing service that offers brokerage and IRA accounts that will do the hard part of managing your investments for you. You (the investor) can select goals choose a basket of up to 12 different ETF and charge a management fee of 0.35% to 0.15% depending on the amount quantity of assets invested. Betterment invests with a robo-adviser service (several large brokerages offer similar products), as the majority of actively managed “human run” funds do not consistently beat the market.
If you prefer the self-directed route, (meaning you choose when & what stocks, ETFs, and mutual funds to invest in) choose a discount broker like Charles Schwab, Fidelity, or Vanguard that charge low transaction fees and have good research material available. There are more options than these, but I have used several of these brokerages and pleased with their service.
My Two Cents
These are the primary reasons I use a Roth IRA. My primary reason is the ability to hedge against potentially higher tax rates in the future. If a person needs to fund their own retirement, this should be the first preference for most people due to the tax savings potential compared to a traditional IRA.
What is your opinion on Roth or Traditional IRAs? How do you save for retirement?
Josh founded Money Buffalo in 2015 to help people get out of debt and make smart financial decisions. He is currently a full-time personal finance writer with work featured in Forbes Advisor, Fox Business, and Credible.