“Pay yourself first” is a common phrase around the personal finance water cooler. The idea behind the phrase is that you must be putting away some money for savings and investing, before the entire check is allocated to other areas of your budget. Part of being able to save and invest is learning to live on less than you make. By becoming organized and living on a budget you will find the disposable income that is required for you to start putting money away for the future. I want to take a few minutes and look as some of the benefits and drawbacks to one of the best retirement options, the Roth IRA.
Benefits of the Roth IRA
There are several benefits of contributing to a Roth IRA. The greatest one is that all growth is completely tax free. If you contribute to a Roth IRA that grows to $1 million, the entire account is tax free. Another benefit is the ability to withdraw the contribution portion, but not the growth, with no penalty. The other major benefit is that there is no age requirement that specifies when you have to begin taking withdraws from the account. Unfortunately, there are also some drawbacks to the Roth.
Roth IRA Contribution and Income Restrictions
One disadvantage with the Roth IRA is that not everyone can enjoy the tax free growth. The Roth IRA has income restrictions that you cannot exceed and still be able to contribute. Below are the income restrictions for 2008 and 2009. I decided to include the 2008 numbers, because if you haven’t maxed out your 2008 Roth IRA, you can still contribute until you file your 2008 income taxes.
|2008||$101,000 – $116,000||$159,000 – $169,000|
|2009||$105,000 – $120,000||$166,000 – $176,000|
If you find that you meet the income guidelines for the Roth IRA, the other drawback to the Roth is the amount you can contribute each year. For 2008 and 2009, if you are under 50 you can contribute up to $5,000 in a Roth IRA. If you have a spouse you can contribute up to $5,000 each. If you are over 50 years old, you can contribute up to $6,000.
Even with the contribution limitations, the Roth IRA is still one of the best long-term investment options for almost everyone. The tax free growth is just too good to pass up. We recommend that you first invest up to the matching amount in your 401(k), but then do everything possible to max out the Roth. In just a few years, using mutual funds with a good track record, you will begin to see huge benefits of the Roth IRA.
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