Tax Free is Better than Taxable
Misconception 1. A Roth IRA is invested a certain way. Truth: People ask me sometimes “How is a Roth IRA invested?” The answer is, “Anyway you want” (based on the investment options offered by your IRA custodian). In other words, you can be as cautious or aggressive as you like. The Roth IRA speaks of the tax-treatment—not the investment. After-tax money goes in. The gains and principle come out tax-free (assuming you’re 59.5 and have held the IRA 5 years).
Misconception 2. Roth IRAs are for young people. Truth: If you’re older, but still have earned income, why wouldn’t you want to enjoy tax-free gains versus taxable gains? The ability to cherry-pick your withdrawals from tax-free accounts as well as tax-deferred accounts can give you greater tax control during your harvesting years.
Misconception 3. My Roth contributions cannot make a big difference in my retirement. Truth: The contribution allowance is now $4000 for those under age 50 and $5000 for ages 50 and older. Double that, and an older couple can contribute $10,000 in one year. That can add up over time.
Misconception 4. If you contribute to a 401(k), you cannot contribute to a Roth IRA. Truth: The amount you contribute to your 401(k) does not limit your contribution to your Roth IRA. Many people would actually be better off getting the company match on their 401(k), and contributing to a Roth next, assuming they cannot save enough to max out both.
Misconception 5. The Roth IRA ties up your money. Truth: The principle from a contributory Roth IRA can be withdrawn for any reason, any time (before 5 years has passed), with no taxes or penalty.
Many advisors will not stress the benefits of Roth IRAs with their clients because they don’t want the paperwork hassle of opening small accounts. But that’s no reason for you to miss out. I can open an IRA account for you in about 15 minutes—traditional or Roth—by phone or in person.