The Roth IRA Retirement Account - Save Now. Retire Later...Tax Free

The unsung hero of retirement plans right now is the Roth Individual Retirement Account aka Roth IRA. If you don’t have a Roth IRA you might want to read the rest of this Blog to see why you should open a Roth IRA.

What is a Roth IRA?

A Roth IRA is a type of retirement account used to save money on an after-tax basis. Generally speaking, money that you transfer into a Roth IRA are completed with after-tax money (you’ve already paid taxes on the funds). Because you’ve already paid taxes on the money, when you start taking distributions at retirement, you will not be subject to federal income taxes on the distributions. Nada. Zip. Zilch. This includes the appreciation of any securities (stocks) you may own during the time you’ve accumulated your wealth from your working years.

Why you should be considering a Roth IRA?

If you know anything about taxes, you know that we’re currently in a tax situation that is lower than what it has been over the past decade. If you also know the level of the federal debt, you know that we’re just spending money and passing it off to the next generation. Logic says that because of this, we’re going to have to raise taxes to pay down our debt (makes sense, right?). With a combination of lower taxes and increasing debt, the idea of a Roth IRA may make better sense

Here is the thing, we know what our tax rates are today, meaning this is a definite. We don’t know what the tax rates will be in the future. If today, you’re paying 22%, but int he future, you could pay 32%, then paying taxes today makes sense.

While I don’t have crystal ball, the idea of raising taxes to pay our debt in the future just makes sense. There are many ways we can pay debt off without raising taxes and I’ll leave that to Washington, DC to figure that out, but from a retirement standpoint, I know we can control what accounts we put our money in.

So if the future may lead to higher taxes, paying taxes NOW and letting our money grow tax-free is a better option. Today is known, tomorrow is unknown.

How to open a Roth IRA account?

It is easy to open an Roth IRA account. All you have to do is go to a brokerage firm like Fidelity or Schwab and open up a Roth IRA account.

It is important to note that there are income restrictions that will limit your ability to contribute to a Roth IRA. If you exceed the income restriction of a Roth IRA, then you should not open a Roth IRA. For more information on this, we recommend that you seek a qualified tax professional so they can get a better understanding of your income and how you might be affected.

How much can you save with a Roth IRA on your taxes?

Well, you won’t save any money today for contributing to a Roth IRA account unless you qualify for a retirement savings credit. The savings comes at retirement. When you take money out of the account, you could be saving a ton of money in taxes then, but remember some will argue that the time value of money of the taxes you paid should be considered in the talk of whether or not you are actually saving tons of money in taxes. However if tax rates go up, then you would have saved money either way.

Did you know that our investing challenges are completed in Roth IRA accounts? Check out our investing challenges right here.