Most investment vehicles don't garner great curiosity, but if any are deserving of that kind of attention, it would be the Roth IRA. Capital Region families inquire about it, even if they know very little about investing.
The Roth version of the individual retirement account lets investors put away $5,500 in 2014; those over age 50 can put in an extra $1,000 in catch-up contributions. But that's no different from the traditional IRA. The significant differences between the Roth and the traditional IRA hinge on when you pay taxes and how much money ultimately goes to Uncle Sam.
- Financial planners routinely say that younger people should invest in a Roth because they would most benefit from its many wonderful qualities. But the truth is, Roth IRA accounts make a good choice for people of all ages.
- With Roth IRAs, savers get a tax-free stream of income in retirement. And it's not just the contributions that come out tax-free. Uncle Sam doesn't lay a finger on any of the earnings. It can be a pretty sweet deal when you're talking about decades of compounding.
- The only catch is that you pay income tax on your contributions upfront (post-tax dollars).
Unlike the traditional IRA, which gives investors a tax deduction for the year the contribution is made, the Roth version lets savers contribute after-tax money today and withdraw principal and earnings tax-free at retirement.
For individuals looking for tax diversification in retirement, the Roth IRA is one of the few tools they can create that ensures that they have a stream of tax-free income in retirement.
Dave Balog teaches financial fundamentals to Capital Region families. Visit his Web page, or call 952-1257.