What? An account that the government allows tax free growth? Get out of hereee!
But wait, it’s true!
Created in 1997, ROTH IRAs allow your money to grow and be withdrawn tax free during retirement. You are not misreading this, it really says tax free. While there are some rules it’s pretty hard to ignore tax free growth.
Say you are 45 years old and you put $5,000 into a ROTH. Let’s assume you never saved another dollar and that money grows at 8% every year until you are 65. At that point you would have over $23,000 tax free dollars.
Now imagine if you put something in every year? While there are maximums, there are no minimums.
As we help families plan their retirement, managing the tax bill is a big concern. Often retired families have paid down their mortgages and can claim very few tax deductions. The income from pensions, social security, and investments can create quite a tax bill. Wouldn’t it be nice to have a chunk of money you could pull from without giving a third to Uncle Sam?
Unquestionably, ROTH IRAs are one of the best ways to invest. ROTH’s are very flexible as you can buy a wide array of investments including stocks bonds, and mutual funds and because the money grows tax free, yes there is that saying again, the sooner you begin the better.
So what’s the catch you ask? Well for one, there is a limit to how much you put into a ROTH, $5,000 if you are under 50, $6,000 if you are more mature. You must have earned income in the tax year, and there are limits to how much you can earn to contribute the maximum amount. You must also wait 5 years after contributing to withdraw the earnings tax free.
But bottom line, if you are eligible to contribute and can afford to save, you really need to consider a ROTH. Heck, there is even an advanced strategy for families who exceed the income requirements known as a ‘back door’ contribution, but we will save that for another post.
If you have any questions or are interested in getting started saving in a ROTH give us a call to help.