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When in My Working Life is a Roth IRA a Good Idea?

Apr 22, 2008
Should I start a Roth IRA? If I should, then when should I start a Roth IRA? Those are the questions retirement investors want to have answered.

The Importance Of Starting An IRA

Certainly, starting an IRA is a crucial move and a good idea for anyone who is getting older - and that is everyone! Retirement age will creep up on you before you know it, and starting an IRA is an easy way to increase your retirement savings. On the other hand, it is never too late to start saving for retirement.

Before deciding whether you should start a Roth IRA, it's important that you understand what a traditional IRA is, so you can decide whether to start a Roth IRA or a traditional IRA.

Regular IRAs

Traditional Individual Retirement Accounts have been around since 1981. Taxpayers can contribute up to $4,000 per year of earned income into an IRA. These contributions are tax deductible in the year they are made. Taxes on the earnings on the account holder's contributions are deferred until they are paid out to the account holder, which cannot happen until the account holder reaches the age of 59 and one-half years.

Roth Individual Retirement Accounts (IRAs)

Roth IRAs have been around since 1998. Single taxpayers who earn more than $116,000 and married taxpayers who earn more than $169,000 cannot contribute to a Roth IRA. So if you earn that much and you are asking yourself, "Should I start a Roth IRA?" the answer is definitely no. For both single and married taxpayers who earn more than $101,000, there are phased reductions in the amount an individual can contribute to a Roth IRA.

If you aren't stopped from having a Roth IRA because of the earnings test, the answer to the question, "Should I start a Roth IRA?" is most certainly yes. Unlike a traditional IRA, the contributions an account holder makes to a Roth IRA are not tax deductible in the year in which they are made. By contrast, the amounts of contributions, and the income they earn, are not taxed during the account holder's lifetime.

For those who are now under the earnings limit, there is a chance that later in their career they will be over the limits. At that time, if they have not contributed to the Roth IRA they will be precluded from doing so (and willl probably wish they had done it when they had the chance). Unless tax laws change significantly, a Roth IRA is one of the best investments you can make. So repeat three times after me: I should start a Roth IRA. I should start a Roth IRA. I should start a Roth IRA.

What to Invest Your IRA In

Remember that any Individual Retirement Account is only as valuable as the investments contains. Think of your IRA as an envelope that holds your retirement investments. What you choose to put inside the envelope is up to you.

Diversification is important. Most financial advisers suggest a blend of bonds, small capital stocks, large capital stocks, and mutual funds made up of shares in domestic companies and international companies. However, a mutual fund can also hold other kinds of investments.

Generally speaking, whatever you choose to invest your IRA dollars in, you should invest for the long term when you are younger and shift to more conservative investments as you age. That is because investments are cyclical over long periods of time, based on the national economy. You don't want to be caught short at retirement time or have to work longer than you had planned to because an economic downturn cycle occurred when you happened to reach retirement age.

Should I Start A Roth IRA? Yes!

The benefits of a Roth IRA over a traditional IRA are enormous: limited contributions vs. no limit on contributions; deferred tax on earnings vs. no tax on earnings. There is virtually no downside to starting a Roth IRA.
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