Like a unicorn with Nikes and a parachute — here's why I love the Roth IRA

Named for the savvy Delaware Senator who in 1997 dreamed up a simple twist in the tax code to create something truly worth shouting about — the Roth IRA is one of the most powerful tools regular people have to get ahead.

Yes, the brilliant switcheroo that Senator William V. Roth Jr. made was to take the traditional upfront tax break we're used to getting with our retirement savings, and instead put it on the back end. What this did was allow most people to pay less tax initially, and then to NEVER pay tax on that money again — offering the peace of mind to know that your growing balance will be all yours (and not the IRS's) when the time comes to make withdrawals.

Why am I crowing about it?

  • First — I like tax free gains. It's like strapping a set of those too-fast, soon-to-be-banned Nikes to each one of your hard earned dollars as they enter your account and let them sprint forward without the heavy drag of taxes.

  • Second — It's multidimensional in how you can use it, because it comes packaged with a few key bonus features. Next to the long goal of retirement, you can also use your Roth IRA savings for college expenses, a first time home purchase, or saving for your hard-working, stay-at-home partner with a spousal Roth IRA.

  • And third (my favorite!) — There's a built-in safety valve that will allow you to withdraw your contributions at any time, for any reason. What?!

When thinking about retirement, many of us are apprehensive of putting our money away for such a long time. And if you work for yourself, volatility and uncertainty could be your normal course of business, pushing you to choose under-the-mattress, instead of a retirement account for your extra dollars. When there's no telling whether or not you'll need that cash next month or next year, it can feel scary to lock your reserves up for decades.

But the Roth IRA can quell those fears. Because you've already paid income tax on the money you put in (your contributions), the IRS won't penalize you for taking it out. The growth on those contributions is another matter, however [you haven't paid tax on that part of your account, so penalties would apply to non-qualified withdrawals]. Still, you can rest easy knowing the dollars you originally deposited are yours if you need them. The Roth IRA is the only retirement account that allows you to do this.

There are a few notable drawbacks

  • The first is that there are income limits. You're only able to contribute to a Roth IRA if your income is below $133,000 for single filers or $196,000 for married filing joint (in 2017).

  • There's also annual contribution limits — $5,500 if you're under age 50, and $6,500 if you're 50 or over.

The combination of these two factors means you'll likely grow out of the Roth IRA as your income and savings needs increase — so I urge you to take full advantage of it while you can, because a tax-advantaged investment account that functions in the short and long term is truly a unicorn in the world of personal finance.

What's my next Roth IRA project?

I'm going to open one up for my daughter. She's 5, but that doesn't mean she can't get to work! Because I have my own business, I have an opportunity to pay her for helping me, and whatever she earns can legitimately go into her Roth IRA. Because she makes peanuts (she’s still working on her very first twenty-dollar bill), she's well below the threshold of having to pay income tax. But think of the power of a few sprinting dollars compounding away for 60 years... Don't you wish your parents had put you to work too? Of course, before you do this yourself, check-in with your tax professional to make sure it's appropriate — I did.

If you want to know more about how the Roth IRA works, or any other cool financial tools, just shoot me an email and we'll schedule a time to talk. I look forward to hearing from you!

Very best, 


The foregoing content reflects the opinions of Insight Personal Finance, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

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