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Money health 2014: Roth IRA, a family's best friend, part 1

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In the maze of financial do's and don'ts, one truth seems to have emerged. For Capital Region families, the Roth individual retirement accounts (IRAs) offer a powerful, sensible, smart way to save for the future (and in some instances, the very near future). Benefits include the ability to use this retirement vehicle also for qualified educational expenses, medical expenses, first-home purchases, and more.

The Roth IRA is named for Sen. William Roth of Delaware, who was a major sponsor and advocate for IRA reform. Roth IRAs are an extension of the IRA--a tax-deferred retirement account intended to help people save for retirement. The Roth IRA was created out of an attempt to correct some of the issues with the IRA. Have a question? Get an answer from a personal finance professional now!

(And for his efforts, Sen. Roth, for whom this gift from Uncle Sam was named, lost his Senate seat the year after enactment.)

The tax advantages

  • Follow the rules and any money you put into this retirement-savings accounts grows absolutely tax free: You won't owe the government a dime as you let your savings accumulate, or when you cash out in retirement. Plus, a Roth IRA is more flexible than a 401(k) and other retirement plans because you can invest it in almost whatever you want, from stocks and mutual funds to bonds and real estate.
  • The idea of saving on your taxes may seem a bit obscure, but it really can pay off big. If a 25-year-old contributes $5,000 each year until she retires and makes an average annual return of 8% on her investment, she'll have $1.4 million saved by the time she retires at age 65. And the money is all hers — she won't have to give the IRS a cent of it if she waits until retirement to withdraw the money.
  • Some premature withdrawals (before age 59 1/2) as mentioned, are permitted for qualified educational expenses, medical expenses, first-home purchases, and more. (More in subsequent columns on the Roth IRA, in this space.)

If you haven't yet opened this gift from Uncle Sam, do it now.

Dave Balog offers professional advice on money basics for families. dbalog99@gmail.com, 355-0967

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