Experts advise younger people to opt for the Roth IRA as their preferred retirement vehicle. It’s the type of retirement vehicle that may allow a young person to drive a BMW instead of a beat-up Ford in retirement. I started investing in a Roth IRA when they were first introduced in the late 1990s. Even though I’m past 40, I still prefer to put my money into a Roth. According to a recent article by USA Today, the Roth IRA is ideal for the young who can pay taxes on the money up front when their income is low. Perhaps the Roth IRA appeals to me because I’m making less than $40,000 a year, which is less than I earned in my 20s and 30s. The real reason I prefer the Roth IRA is because I fear higher taxes for everyone in the future. A Roth will give me an out when it comes time to pay taxes in retirement.
Opting for the 401(k) Roth
When I first started working for a company, I had a 401(k) with matching contributions. However, my company did not offer a Roth 401(k). Now that the Roth version is available to me, I use it instead of lowering my tax liability now. Whether I choose a traditional or a Roth, my contributions grow tax deferred. For me, it’s all about hedging my bets against an unpredictable future. I don’t want any unpleasant surprise tax bills if I withdrawal money from a traditional IRA or traditional 401(k) in retirement.
Tapping my Roth
According to USA Today, another advantage of the Roth IRA is the fact that a person can withdrawal his or her contributions with no penalty. At the same time, I can’t borrow money from my Roth IRA. I can, however, borrow money from my Roth 401(k) if I really want to. In the past, I’ve taken my contributions out of my Roth IRA and borrowed money from my 401(k) for everything from college to cars. As I grow older, I may need to access my Roth money to pay for medical bills.
Paying off my mortgage
I don’t want to enter retirement with a mortgage hanging over my head. I would also love to get rid of my mortgage immediately if I lost my job. While I wouldn’t consider now that I’m in my 40s, I would definitely tap my Roth in my 50s to pay off my house if I lost my job. It’s nice to have the flexibility to use retirement money for other purposes as long as I take out my contributions and not my earnings. With regard to a mortgage, the Roth IRA benefits older people by giving them choices.
I encouraged my son to open a Roth IRA as soon as he had earned income from a job at age 18. On the downside, young people don’t always have as much disposable income. Saving for retirement isn’t his first priority. I like the fact that I can invest however I like within my Roth IRA account. I opened my account through a discount brokerage firm in my 20s. It’s 16 years later, and I’m still happy that I opened a Roth. If I had maxed out my Roth every year, I’d have at least $65,000 in contributions alone. At this stage in my life, I regret not maxing out my Roth each year.
More from this contributor:
Becoming a Roth Millionaire
Converting to a Roth
Investing after a Roth Wipeout