Roth IRA

A Roth IRA is one the forgotten Investment tools. Most work retirement plans do not offer a Roth which is why most people do not own one. A Roth IRA is one of the most powerful investment tools. Roth IRA’s need to be started early because there are income restrictions when it comes to contributions. The IRS increases the limit yearly however if you are a high-income earner, it makes it difficult to contribute a large amount if any. The have also been increasing the contribution limits so make sure you check before you start contributing. One of the biggest downsides is that Roth contribution is not tax deductible meaning you will not be able to claim the contribution like you can to a traditional IRA. This a small con in the grand scheme of things especially if you start this once you start working. Distributions from a Roth can start as early as 59 and a half if you have had it for at least 5 years.

Let’s talk about what a Roth IRA is. A Roth IRA is a retirement tool that allows tax deferred growth, but distributions are not taxable. This the most effective way to make sure you have a low tax rate in retirement. This works well for the individuals who are still allowed to have a pension like government workers.

Look at this scenario:

Contribution of $3600 (or $300 a month) a year starting at age 30

Contribute for 30 years

Average Return of 8%

$444045.12

This is over $400000 of tax-free money in retirement. In retirement you can change the investment strategy from growth to income. Let’s take that 8% return and turn it to an income strategy. That is $35523 in tax free distributions. That is the equivalent to have a job making close to $50000 a year. If you have a pension this is the best way to add income with having to get a part-time job and the cost is only $300 a month.

If you are a high-income earner don’t worry subscribe to see our next post about Roth IRA conversions and back door Roths through life insurance.