401(k) plans are starting to take a backseat with the birth of the Roth IRA. The Roth obviously has several advantages over the regular retirement plan, and as soon as you’ve started earning in your job, investing in a Roth just might be one of the smartest investment decisions you’ve made just yet.
So what exactly makes a Roth so smashing? Here are some of the reasons:
1. Tax FREE! - Anything that’s tax free should be worth celebrating. And we only ever get this with the illegal stuff. That’s why it’s good to know that every penny you invest in a Roth plan won’t be charged with a single bit of tax. This could mean a whole lot of savings for you, and a bigger chance to earn more with the interest.
Here’s an example. Let’s say a 25 year old faithfully invested $5,000 per year in his Roth IRA. By the time he retires, he would now have an amazing $1.4 million saved in his Roth at an 8% interest. Without tax, he can enjoy this money without having to pay Uncle Sam a dime. If however, he were charged with tax, his $1.4M will be reduced to only $1M. Ouch.
2. Varied Investments - Stocks, bonds, mutual funds, real estate, you name it, you can invest in it. This makes the Roth IRA more flexible than 401k’s and other retirement plans.
3. Diverse uses – Although the Roth IRA is made especially for retirement, it can be used for other essential life events. These include first time home buying, your child’s education, and even through tough times. There are some rules of course, which you have to be familiar with. And since the Roth really is for retirement, try to keep in mind that that’s what you’re going to use it for.
Obviously the Roth IRA is like a gift from the government. But as always, there’s some strings attached. You can only contribute to the Roth the money that you have earned yourself. Meaning, any inheritance from your parents won’t be counted as a contribution. Also, you can’t contribute more than you make. If you earn $5,000, then you can only contribute $5,000.
The Roth is also partial to the rich, because you can only contribute the full $5,000 per year if your income is less than $105,000 for singles, and $166,000 if married and filing a joint tax account. Income more than that can be phased out incrementally. That’s why it’s wise to start contributing to a Roth while you’re still young and your salary is still within the lower limits.
Despite the restrictions of the Roth, it still beats that regular 401(k) and for anyone who does have the means to contribute, doing so will be a wise decision that will pay off for the rest of your life.