10 Reasons to Get Off Your Butt and Start a Roth IRA

10 Reasons to Get Off Your Butt and Start a Roth IRAI really love the Roth IRA.

There are so many reasons to start one of these bad boys and get going with your retirement savings.

Today I thought I’d do a little convincing and list some of the reasons to start a Roth IRA. So check these out and then get started.

Seriously. No excuses.

1. You’ll Be More Prepared for Retirement

The Roth IRA was created to provide incentive for you to save for your own retirement. Use it. Retirement will be a big chunk of your life. Do you want to be relying on someone else to fund your trips to see your Grand kids or your golf course green fees (or fill in the blank with what you want to do)??

2. Pay Less in Taxes

The Roth IRA was created as a result of the Taxpayer Relief Act of 1997. This account allows you put in after-tax dollars, and never pay taxes again on those funds, AND never pay taxes on the earnings from those funds. If you used a regular savings account, CD, or taxable investing account for retirement savings, you’d have to pay taxes on your earnings. With a Roth IRA you can avoid all of that.

3. Tax Diversification

Odds are you already have a 401K or Traditional IRA. Those accounts use pre-tax dollars and then tax you when you retire. The Roth IRA is just the opposite. It uses after-tax dollars and then you never have to pay taxes on those funds again, or the earning you’ll receive from those funds. So by having both a 401K and a Roth IRA you hedge your bets against the future of taxation in the U.S.

4. More Control Over Investment Options

With a Roth IRA you have a broad range of investment options. Unlike your 401(k), you’re not restricted to a limited number of funds you can invest in by opening a Roth IRA. This is great because you can go out and find funds with lower expense ratios. Which will allow your retirement savings to grow even faster.

5. Because You’re Young

Young people have two big advantages with a Roth IRA: the power of compounding and a low income. For instance, if you’re in your 20s, you have around 40 years until you’re able retire. That’s 40 years that your money has to grow and compound on itself. Also, since you have a low income now, you’re more likely to fall under the Roth IRA income limits. High income earners aren’t able to contribute to a Roth IRA. Invest in a Roth IRA while you still can.

6. Because You’re Old (um, I mean not young anymore)

If you’re older than 50, and your income is still below the limits, you get to contribute an extra amount each year in “catch-up” contributions to your Roth IRA. That’s more tax advantaged savings towards your soon-to-be retirement.

7. You Can Withdraw the Contributions Without Penalty

With a Roth IRA you can withdraw all of your funds (both contributions and earnings) tax-free and without penalty at age 59 and a half. But there are circumstances that allow you to do a Roth IRA withdrawal even earlier.

While I don’t recommend this practice, you can withdraw funds from your Roth IRA prior to retirement to be used for whatever you want. As long as you don’t pull out more than your original contribution, you won’t be taxed or penalized. Pulling out earnings is what gets you taxed and a 10% penalty. But there are even loopholes for that.

8. Use Funds to Buy Your First Home

You can withdraw some of your Roth IRA funds (contributions and earnings) if and when you decide you want to buy your first home. Again, I don’t recommend using your Roth IRA for a down payment, but it’s good to know the Roth IRA is so flexible.

9. Extra College Savings

While I believe you should try and put retirement before paying for their kid’s college, you can use the Roth IRA funds towards a college education. Some people specifically use a Roth IRA to save for college expenses.

10. It’s Easy to Start a Roth IRA

Opening a Roth IRA can be done online in less than 30 minutes. If you need more convincing or a helping hand through the process, check out the Roth IRA Rules and how I Opened My First Roth IRA.

Do you have another reason to start a Roth IRA? Leave it in the comments below…

Avatar About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. #8 is not correct (as Don@MoneyReasons has already noted). You can withdraw all of your contributions at any time (for any reason). For a first-time home purchase you can withdraw $10,000 of earnings tax- and penalty-free. You can’t withdraw all of your funds from a Roth IRA without penalties unless you are over 59.5 years old.

    I see that this post has been up for quite a while and was updated last year. Please correct this mistake (or point me to the appropriate IRS rule if I am wrong!).

  2. Avatar JoeTaxpayer says

    @Ginger – My numbers do make some assumptions. I assume there will be a structure that contains exemptions ($3700 per person in 2011) and a standard deduction ($11,600 MFJ in ’11).
    This alone is $19,000 for a couple that comes out of their IRA tax free. You would need $475K to generate this, at a 4% withdrawal rate. Now, I agree to take advantage of your current 10% bracket, as I imagine that once you break out there’s no going back. By the time you are in the 15% bracket and save that first half million $$, you’ll be able to review if these numbers have changed. I like your approach, and think you’ll do fine. My issue is with those who are jumping on the conversion bandwagon, paying tax now at 25% or higher but will retire in 15% bracket.