Answering the Age Old Question of Retirement Investing...

…to Roth or not to Roth?

As a gal in my mid-twenties, the topic of discussion comes up frequently at happy hour and book club. Television talk-show hosts (or as Jon likes to call them, Wall Street pundits), parents, grandparents and even friends encourage young investors to open a Roth IRA and “Trade! Invest! Save for your future!”. The usual blanket advice. But what’s the benefit of a Roth IRA anyways? And are Roth IRAs just a young man or woman’s game?

Contributing towards retirement at a young age has many benefits, including more time for funds to appreciate, more opportunities to produce durable sources of income, and a longer investment time horizon to ride out any market fluctuations. These are most of the reasons why young people are encouraged to invest early, however these are benefits of general investing and not necessarily using a Roth or Traditional IRA.

Roth IRAs can be a great tool for individuals wanting to benefit from taxfree distributions in retirement. If you contribute to a Roth as a young person whose earning potential (key word - potential) is high, then paying
taxes at a lower rate now might be a good course of action. For someone in their 50s-60s whose income potential is fully realized (aka - their income is
high), investing in a Traditional IRA and paying the taxes in retirement at a lower taxable rate might be the way to go. As a person continues to contribute funds towards their Traditional IRA, Christmas will arrive early in the form of a tax cut up to a certain dollar amount.

We get the “Roth” question almost as much from retirees as we do from my book club friends. Roth conversions (converting traditional IRA funds into Roth IRA funds) can be a good strategy to those who want to pay the taxes up front and not worry about it when they take distributions, however most of that depends on personal preference over anything investment related.

At the end of the day, the importance lies in the act of saving and not necessarily in what type of investment vehicle you choose. Having retirement funds readily available when you need them, whether in a Traditional, Roth, Simple, Single K or all of the above, takes the cake.

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