Why I Chose a Roth IRA Over a Traditional IRA
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Roth or Traditional? For many latecomers to the retirement game, this question is a puzzling one. For me, it was simple – the Roth IRA.
Why? Because my mom said so. I kid, of course.
The appeal for the Roth IRA has been contagious ever since it came into existence in 1998. Personal finance gurus and experts have contributed to the popularity of the Roth IRA while giving less love to the Traditional IRA, which has caused some of the confusion over the paramount question – “Which one do I use?”.
The answer to this question lies entirely on the individual’s financial situation, prospects, and attitude. Here are the reasons that led me to determine that the Roth IRA best suited my personal goals towards retirement planning.
- Tax-free growth. I love the fact that I don’t have to worry about paying taxes when I withdraw my earnings. The thought of losing a good chunk of an account worth $10 million (fingers crossed) is disheartening. Like for most others, taxes-free earnings and withdrawals are the main benefits that led me to choose the Roth IRA.
- Time is on my side. The power of compounding is best abused by those who have time – more time for my money to make more money. Accompanied by tax-free growth, lots of time clears a smoother path toward accumulating a substantial nest egg. At 22 years of age, I have to time to recover from the bad economic times that lay ahead.
- Account flexibility. Because I can withdraw my direct contributions any time without taxes or penalties, the Roth IRA can act as a highly inaccessible financial account – but accessible nevertheless. With more time in my hands, more unexpected and spontaneous situations can occur and it’s nice to know that I have somewhat of a backup as a last resort.
- Dedication to saving. To maximize the tax benefits of a Roth IRA, it is obvious that I need to contribute the maximum. Without a committed attitude towards saving, I won’t be taking full advantage of such a lovely tax-deferred account – it doesn’t matter what type of IRA.
Roth IRA’s Fame
It’s probably for those same exact reasons I stated above that persuaded others to sign up for their Roth IRAs. The Roth offers great tax advantages, especially for the many twentysomethings who are just getting serious about their personal finances.
(Photo credit: Mykl Roventine)
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4 Comments on this post
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Jennifer @ 401k IRA said:
You don’t read a lot of 401k articles written by 22 year olds, good for you! It’s amazing how many people put off their retirement savings until much later in life.
Anyhow, I agree, Roth IRAs have a lot of benefits! Especially for someone so young
May 10th, 2010 at 9:30 pm -
Alex said:
I agree with Jennifer! I appreciate the info you provided because you and I are in the same age bracket. Thanks!
May 13th, 2010 at 9:24 am -
bob said:
I disagree with your first two points. Paying taxes now and paying taxes later are the exact same thing, assuming that the tax rate you pay is the same. Sure, the taxes might take a percentage of your $10 million later, but if taxes took the same percentage out of your starting investment, then you would have less money to start with, and you would end up getting the same amount. This is amazingly simple math concept. Assume taxes of 35%:
Taxes before:
(0.65) x (1.1 x 1.2 x 1.1 x 1.3 x 0.9 x …) <- annual growthsTaxes after:
(1.1 x 1.2 x 1.1 x 1.3 x 0.9 x …) x (0.65)If you know anything about math, you would know that these are the same.
February 17th, 2011 at 4:10 am
[...] is a decision that troubles many people looking to build their nest egg. I’ve sounded out my reason for choosing a Roth IRA over a traditional IRA. You probably want to check out the beautiful infographic if you have this decision to [...]