Roth IRA Discussion Overcoming Fears Part 1

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Do you have a Roth IRA, yet?

If not, today I’m going to try to convince you to both open up a Roth IRA and to start contributing to it!

But before I start my discussion, do you meet the following basic requirements?

  1. Did you have earned income this year?
  2. If you are single was your income less than $107,000? or if you are married (and filing jointly, is your income less than $169,000)?  I’m ignoring the income limitations a bit and keeping it simple.  check the irs.gov site for more details if you are interested.
  3. I’m assuming that you work in the US and are an US citizen, if you are not, then the Roth IRA probably doesn’t apply to you (sorry)

Okay, on with the discussion!  The following are concerns from people who I have talked to during various points in time over the past few years.  Just to make this article flow more smoothly, I’m to orchestrate the following in a two person dialogue style, for simplicity.  So it will be me (MR) and my composite friend that I will call V.

MR.:  Why don’t you have a Roth IRA?
V….:   I don’t want to tie up my money in an account that I can’t tap into until I retire.  I might need that money.
MR.:   Actually V, the money you contribute can be taken out at any time without a tax penalty or other government fees.

V….:   What about the waiting 5 years and some type of complex distributions system or waiting until I am 59 1/2 rules?  Why 59 and 1/2 and not 60?
MR.:   I have no idea why 59 1/2, sorry very strange choice in my opinion, but what the rules identify for the 59 1/2 and 5 years and some type of complete distribution system, is on the earnings!  The “earnings” is the amount that your investments equals above the total amount that you deposited into the account (the deposits are called contributions in IRS lingo).

V….:   So you mean to tell me that I can deposit (contribute) the entire $5,000 limit for the year, then a month later pull the entire $5,000 out, let’s say for some type of emergency, and I’m not breaking any rules?
MR.:   Yep and let’s say that you contributed $4,000 for the last three-year for a grant total of $12,000 worth of contributions.  You can take that entire $12,000 without any type of government problems.  Sweat deal if you think about it, and it’s one of the reasons that I use my Roth IRA for a 2nd level Roth IRA emergency fund.  I’ll probably never need it, but it’s nice to know that it’s there.

Do you have a Roth IRA, and are you putting money into this great investment vehicle?

Cheers,

MR

 

29 thoughts on “Roth IRA Discussion Overcoming Fears Part 1”

  2. Yep, I love the ROTH IRA. 2nd best option to retirement planning, especially for young people. I love the dialogue. Great way to communicate it’s perks.

    • Thanks, this is my second attempt at it. I’ve think the next similar approach, I’ll use different colored text (like I did in my first article that I did a while back).

    • Me too 🙂

      I would love not to qualify because I make too much money… Of course there is always other options like an individual 401k or even a SEP…

  6. My Roth IRA seems to draw the short straw on appreciation. I put too many risky investments there in hope of not having to pay tax when they rise. Needless to say those risky stocks did not perform well.

  7. We started contributing as soon as they came out, even though we also had 401(k)’s through work. Even with the ups and downs of the market,they are doing quite well.

    • I agree, I’m having a lot of fun with mine. I don’t use it quite like I should though…

      My wife was an accountant, but now is a SAHM, so our retirement balance isn’t quite a good as it could be. Much better than average, but still not to the level that I would like it to be.

  10. The Wife has a very small Roth…I have more focus on bringing down our taxable income with the use of my traditional IRA and 401(k).

    May bring it back into focus after next calendar year when my cash savings needs ease up a bit.

    Fantastic points about the roth that most people forget or don’t know.

    • I have to admit, my 401k is my primary instrument for saving for retirement too. While my tax savings isn’t that great, it’s better than nothing, especially once the match is factored in 🙂

      I the term contributions confuses people, if they use the term “deposits” instead I think that would make it clearer…

      Personally, I like it for the dividend benefits…

  12. All right I just learned something: if I put into ROTH and then suddenly I need money, I actually can take it out without a penalty? Is that right? I’ve been thinking on oepning one but its flexibility always concerned me.

    • Exactly (well minus any earnings that you might have gained).

      This is why I sometimes refer to my Roth IRA as my Stealth Emergency Fund?.

      I need to start contributing the full amount. It seems like I’m always a little tight on cash, but I hate not putting money in it…

  13. Yes, MR, I remember when you first brought up those points pertaining to earnings to me. I appreciated how insightful your comments were. The Roth IRA is a fabulous retirement vehicle that I wish more people would take advantage of. You used a nice conversational style for this post!

    • Thanks.

      I actually had a conversation similar to the one above when I recently was talking to a friend of a friend. I didn’t really ask why he didn’t have a Roth IRA though, I was just talking about it in general when the conversation happened. I hope he takes the leap and opens one.

  14. I’m generally great with money and with savings, but I’m always intimidated by retirement accounts, and for no good reason. This explanation makes it easier for me to think of an IRA as a savings account (which is totally inside my money comfort zone). Thanks for giving me a way to shift my thinking.

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