Should you invest in a Roth IRA?
Many people are eligible for the Roth IRA, which is a retirement account that you fund with after-tax money and whose earnings and payouts are entirely tax free. In comparison, the Thrift Savings Plan, a 401k, 403b or a regular IRA are funded with before-tax money, earnings are tax free, but payouts are taxed as income. Which is better?
Well, the truth is is that all of them are better! If you can invest your money in both, do it and shelter your money from our friend Uncle Sam. There are some advantages to either account types in some situations:
1. Always maximize your the amount of money your employer will match in your TSP, 401k, or 403b account. It’s free money! The Roth has no such match, except for the new Roth 401k’s.
2. The Roth is an astonishingly good way to pass tax free money across generations if you follow the rules set up by the IRS. The Roth is still subject to inheritance taxes, but if the total amount in the IRA is under the two million dollar exception amount (in 2008), then your child can inherit the account tax free. You child can then take minimum distribution amounts over their lifetime tax free and then pass it on to your grandchildren for even more tax free savings for your family. More information here.
3. You can withdraw your contributions from the Roth tax free at any time. Earnings, however, must stay in the account until age 59 1/2 and have been in the account for five years or they will be subject to a 10% penalty.
4. If you expect to be in low tax bracket when you retire, the Roth IRA doesn’t buy you as much in tax savings.
