In years gone by people gave much less thought to
retirement savings issues than is common today. Many
individual's spent their entire careers working for a
company, who in turn, paid them generous pensions when
they retired. In addition, people could count on the
fact that Social Security would be there to help them
out. However, times have changed. For the most part,
company pension plans have gone by the wayside as a
result of budget cuts, and the long term future of
Social Security is fairly bleak. In addition, more money
is needed for retirement today than ever before as a
result of increasing life spans. It is not at all
uncommon for an individual's retirement to extend as
long as 30 years These factors have made it necessary
for people to find effective methods to generate
adequate levels of retirement savings.
Perhaps the best way to save for retirement involves
the newest alternative which is available: the Roth IRA.
This investment plan which was created in 1997 has some
unique benefits which set it apart from rival
options.
Advantages
- Money grows and is withdrawn tax free. This is a
huge difference from alternative methods of savings,
such as 401K plans and traditional IRA's. Any money
that is placed into a Roth IRA account is taxed up
front. This allows individuals to withdraw the money
during retirement on a tax free basis. This is a
tremendous benefit because most people are less likely
to afford a tax bite during their retirement years.
- Larger returns. Many people would claim that a
traditional IRA or a 401K is more desirable than a
Roth IRA because of the up front tax savings. The
argument goes that if an individual were to invest his
tax savings, then over the years it will create a
greater balance. The problem with this argument is
that the VAST majority of people do not invest their
tax savings. As a result, the Roth IRA, will generally
provide a larger return in the long run.
- No age restrictions. There is no penalty for
withdrawing money before a set age. If a person wishes
to retire at age 55 (or 25) he can access his funds
tax free.
Although these benefits are very advantageous it is
important to note a couple of facts. First, individuals
are currently limited to investing 3,000 annually into a
Roth account. As a result some people may find it
necessary to supplement their savings with an
alternative vehicle. Secondly, many companies offer to
match employee contributions to their 401K plans. In
this scenario it would be wise to invest in the 401K up
to the matching limit and place all remaining money into
a Roth. (The only exception would be if an individual
did not plan on remaining with a company long enough to
become vested).
A failure to adequately prepare for
retirement can lead to significant financial hardships down the road.
Investing money into a Roth IRA is great way to
help ensure that your goals and dreams are
met.
