Should I invest in a ROTH IRA?

Question

I'm 42 and am putting in 15k in my 401k. I get matched on first 5%. I am currently married and in 28% tax bracket. My 401k is invested in American Funds and Vanguard funds. I own and do not rent and am not interested in real estate (sorry I don't buy the hype, the market outperforms real estate over time.) Really want to know what the benefit of putting money into a Roth would be.

Answer 1

You're obviously doing an excellent job at handling your financial affairs and I agree with you regarding real estate..I'll try and keep it simple...My suggestion would be to invest up to the 5% match in your 401k, then max out your roth IRA (proabably $4k for '06 but may be less and possibly zero if you make too much earned income: check the IRS website)...then increase your 401k contribution up as high as you feel comfortable with. The reason is tax diversification....if your tax bracket is higher in retirement than the roth ira is probably better, if it's lower in retirement than then the 401k option is probably better..but one thing we do know...diversification is almost always a good thing beacuse of uncertainty in life. (note: Some people will say the roth ira is always better than the 401k because it grows tax deferred and distributions are tax free but they forget to consider the fact that you lose the tax benefit initially and they don't calculate the future growth of the tax benefit over time that is received at the time of contribution with a 401k)

Answer 2

When you retire, your 401K will have to be transfered to an IRA (which could be flipped over to a Roth IRA).
Here are the advantages of a Roth over an IRA
1. You can leave the money in for heirs. With an IRA, you must start taking the amount at 72 1/2. Also you must take a minimum amount out.
2. You will end up paying less taxes. Would you rather pay taxes on $90,000 worth of money going in the Roth Ira or $1 million going out of the standard 401K to IRA? Those numbers are possible for people starting at 18 years old.
3. You don't have to just put stocks and bonds in your Roth. You could put other objects of investment such as art and real estate. You have to contact the broker of the Roth for this.

Answer 3

Two benefits.

1) In an emergency, you can take out the amount you've put into the Roth without a penalty.

2) If you think your tax rate will be higher when you start using your retirement funds, put money into the Roth because it gets taxed now... and you don't pay any taxes on it later.

Answer 4

Roth's are excellent. That is the biggest gift the government has given US citizens for our retirement plans.

Once you put your money in the Roth, the account grows and you will never have to pay taxes on that. Also, after you die, you can give the Roth account to your dependents, and they won't have to pay taxes on the account as long as they leave the money in the account.

Side Note: Vanguard is a great passive investment, and American Funds are a great active investment. AF has beat V for a long time and probably will continue with their strong investment philosophy. Go strong with AF!

Answer 5

If you don't have to reduce your " adjusted gross income" by taking out a Traditional IRA...Then a Roth is ( down the road) "a gift from the gods"..." manna from heaven" anything you want to call " the best deal you can imagine" TAX FREE income? I pay so much in this tax, and that tax, and another tax.....( example: five years of my current property tax is more than I paid for the house!!")
I would scrimp on the 401 ( if you have to) to take out a max-Roth from now until......
P.S. Not all the real estate talk is hype...it's true what they say about location.....What I paid $ 47,000. for twenty-six years ago is now worth $ 750,000. (You'd have to be REALLY good at the market to do that.

Answer 6

Assuming you earn under the cap, the Roth is the best bet you can have.... the proceeds earn TAX FREE. Compared with a normal IRA that earns tax-deferred... everything you gain in the Roth is free of taxes. Does not get better than that.

Answer 7

At your age, google roth vs. traditional IRA and see what is better for you. I think traditional may be better at your age.

The rule to remember about IRA's is that traditional IRAs are tax-deferred (looks like you made less because it's tax-deferred which helps your taxes at the end of the year) and Roth IRA's are tax-free, which means that you pay nothing on the gains you've made thoughout the year. But they are not tax-deferred.

Answer 8

it should be agood idea because Suze Orman always mentions it