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5 Reasons Why I Love My Roth IRA

With the future of Social Security in question and defined benefit pensions all but extinct, it's now more important than ever to take personal responsibility for your retirement savings.

A wealth of options exist for building your retirement nest egg, such as a 401k, Traditional IRA, Roth IRA, 403b, SEP IRA, etc.

Each account type has its merits, but hands down, my favorite is my Roth IRA. Why do I love my Roth IRA so much?

I can give you any number of reasons, but five in particular stand out. My Roth IRA gives me:

  • More Investment Choices
  • More Control
  • Tax-Free Withdrawals
  • More Retirement Savings, and
  • It Doesn't Require Me to Withdraw Funds in Retirement

But allow me to get more specific and tell you exactly why I love these features...

1) More Investment Choices

More Investment Choices

Most of my friends use a 401k as their primary vehicle for retirement savings, and while a 401k is a good option, I make sure to fund my Roth IRA first. In fact, when I recently started a new job, I took the opportunity to rollover the 401k from my old job into a Traditional IRA and then convert it into my Roth IRA. Why?

One reason is the wide array of investment choices at my disposal with a Roth IRA. For instance, my current employer offers a great 401k plan, but as with most 401k plans, I'm limited in my investment options. I can choose between approximately 15 or 20 mutual funds, and in all honesty, I don't think I would invest in any of them if given more options.

But with my Roth IRA, I'm in charge. Personally, I like to invest in individual stocks, and I can do that with my Roth IRA. But if I didn't invest in individual stocks, I'd probably choose a well-diversified index fund with a low expense ratio - an option not currently available through my 401k plan at work.

My Roth IRA simply gives me greater flexibility and more options - not just to buy individual stocks or index funds, but commodities, bonds, ETFs, real estate, or just about any other type of security available.

2) More Control

This aspect goes hand-in-hand with the wider range of investment choices. My Roth IRA gives me more control than my 401k.

As previously mentioned, my current 401k offers limited options, all of which involve mutual funds with expense ratios higher than I would ever choose to pay on my own. For instance, most of our current options have expense ratios ranging from 0.4% to 1.0% - much too high in my opinion. For example, the Vanguard Total Market Index (VTI) offers me excellent diversification with an expense ratio of only 0.07% - that's a savings of at least 0.33% per year, which adds up to an enormous amount of money over the long haul. But it's not an option in my 401k. With my Roth IRA, it is.

Also, since I buy individual stocks, I simply pay a small, one-time fee to purchase each stock. I don't have to pay an annual expense fee for someone to manage my investments.

In addition to providing more control over my expenses, my Roth IRA also gives me greater control over what I'm invested in. For instance, our 401k offers a range of mutual funds. And while each mutual fund has an investment theme, they aren't tied to any particular index. So I have no idea what I'm invested in from moment to moment. I have to trust the fund manager, and I don't like to trust other people with my money. Not that other people are disengenous or have bad intentions. It's just that I personally feel if I'm going to be responsible for my own retirement savings, then I need have ultimate control over where my money is. If someone else is making my investment decisions, I don't.

For instance, with a S&P 500 index fund, I know exactly what my money's invest in - the S&P 500. But with a managed "mid-cap" fund, I might be in the best mid-sized companies or the worst. I really don't know, and I don't like not knowing!

3) Tax-Free Withdrawals

Points #1 and #2 alone are reason enough to love my Roth IRA. But when you throw in tax-free withdrawals, I really love my Roth IRA!

Not only are all my withdrawals after age 59 ½ tax-free, but I can withdraw my original contributions tax-free and penalty-free at any time and for any reason! Try that with a 401k or Traditional IRA.

Of course, those accounts are funded with tax deductible contributions versus after-tax contributions, but for me, I'd rather pay taxes now so I can make tax-free withdrawals later. After all, who knows what my tax bracket will be in retirement? And if I don't know what my tax rate will be, I can't know how much my taxable retirement accounts are really worth. And if I don't really know how much they're worth, how can I know if I've saved enough to fund the lifestyle I want in retirement?

I'll take the tax-free retirement!

4) More Retirement Savings

A Bigger Retirement Savings Nest Egg!

The fourth reason I love my Roth IRA is I can save more money with it!

As someone under age 50, I can contribute a maximum of $5,000 per year to my IRA. Whether those contributions go into my Roth IRA, Traditional IRA, or some combination thereof, they can't total more than $5,000.

While some people may choose a Traditional IRA over a Roth IRA for the immediate tax deduction, I gladly choose my Roth IRA. Why?

As someone who makes it a priority to max out my retirement savings year in and year out, I can save far more money for my retirement putting $5,000 in my Roth IRA instead of my Traditional IRA. Why? Precisely because Roth IRA withdrawals are tax-free, while Traditional IRA withdrawals are not.

While $5,000 invested at 10% per year for 40 years equals the same $226,296.28 in both a Roth IRA and a Traditional IRA, that $226,296.28 is tax-free in my Roth IRA, but fully taxable in my Traditional IRA. So I really have more money in my Roth IRA. For example, if I'm in a 25% tax bracket in retirement, that $226,296.28 is only $169,722.21 in a Traditional IRA. So I manage to save an extra $56,574.07 by investing in my Roth IRA instead of my Traditional IRA!

And why would I want less money in retirement instead of more?

5) No Required Minimum Distributions

The final reason I love my Roth IRA?

I'm not forced to withdraw money once I reach an arbitrarily pre-determined age. That's not the case with my 401k or Traditional IRA.

For example, under the current IRS rules, you're forced to start taking annual distributions from your 401k or Traditional IRA at age 70 ½ (although that rule has been temporarily suspended in response to the 2008 financial crisis).

But with my Roth IRA, there isn't an age when I'm forced to take my money out. And this gives me much more flexibility. After all, what if I don't need to tap my retirement savings at age 70 ½? What if I'm still working? Or what if my fully taxable savings combined with Social Security or a pension is more than enough to get me through to age 75, 80, or older?

With my Roth IRA, I'm in control of when I make withdrawals. I'm not forced to do anything. In fact, if I want to let my money compound tax-free until I die at age 100, I can do so. Then my beneficiaries can reap the rewards of decades of tax-free growth.

If You Don't Have A Roth IRA, Open One Today!

So what's the lesson here? If you don't have a Roth IRA, open one today!

Due to the large degree of flexibility and especially the tax-free retirement withdrawals, I don't think I can give you any better financial advice than to open a Roth IRA and contribute the maximum amount possible.

This is especially important if you're young. For instance, a 30 year-old who saves $5,000 per year at 10% has $1,495,634.03 at age 65. Not bad. But a 20 year-old who saves $5,000 per year at 10% has $3,958,976.60 at age 65. That's a $2,463,342.59 difference - almost three times as much money - just because you started 10 years earlier!

Don't be one of those people who harbor deep regrets when you reach retirement age, wishing you had saved more money earlier in life. Instead, take charge of your financial future now by opening and funding your Roth IRA.

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