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Investing

I know that it is important to save your money for the future, is a Roth IRA a good idea to start saving now?

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Investing

The younger you are, the better a Roth vehicle is.

 

Why?

 

Because not only are you not taxed on the money you take out of the Roth (after age 59 1/2), but you are not taxed on the earnings. If you have put $50,000 in a Roth IRA over time, but this grows to be $150,000 over 30 years, then the $100,000 in gain is totally tax-free. You don't pay tax on the gain when it happens, nor do you pay tax on the gain when you pull it out of the Roth IRA upon retirement.

 

If you have decades before retirement, the money in the Roth IRA can triple or quadruple over time - all tax-free!

 

Compare this to a traditional IRA...yes, you get a $50,000 deduction when you contribute that $50,000 while you are working...but when you pull the $150,000 out of the IRA, you pay tax not only on the $50,000 you put in, but also on the $100,000 that you earned.

 

Worse, even though you may have had capital gains on the money that you put into the IRA, you pay ordinary income rates on all gains, even the ones that would have otherwise been subject to the lower capital gains tax rates had the account been an after-tax account. You are delaying paying taxes on the IRA, but the tax rate is not the cheapest (unless your income is a lot lower after retirement).

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