Roth IRA that is.
I’m very fond of the Roth IRA. With tax time upon us, I’m going to take a moment to sing it’s praises!
First the facts: You can put $5000 ($6000 if you are over 50 years old) in a Roth IRA for 2007 before April 15th, if you AGI (Adjusted Gross Income) is less than $101k Filing Single, or $159k Married Filing Joint.
There is a phase out up to $116k Single, and $169k MFJ, so if you are within that range contact your accountant to find out how much you can pay. It’s important to stay at or under the limit, because there’s a 6% penalty if you go over. You can open a Roth at almost any financial institution.
But you have to hurry. It must be put in by April 15, 2008 to be considered for 2007.
Super Charged Savings!
You get to put it into a mutual fund (I like a nice stable index fund like the Vanguard S&P 500: VFINK) so the interest rate will be far better than that 2% you get from your regular savings account. (VFINK 5 year average is 11.5%) And here’s the best part: Because you pay into your Roth with after tax money, you can withdraw your principal at any time without penalty. Not the gain of course. That is locked up till your 59 1/2. DISCLAIMER: I do not encourage taking out this money because once it’s out you can’t put it back in, then you loose the benefits of compounding interest. However, in an emergency, (like an auto accident, not a Bahama vacation) having access to this money could be very helpful.
So you get some liquidity, a better rate of return, and one more thing.
The Devil you Know
After tax money is from your net income. For example the money you put into your 401k is Pre-tax money. So, because you already payed tax on the money before it goes into the Roth IRA, when you take your money out (after age 59 1/2) it’s tax free. Let me say that again TAX FREE.
Compare that to your 401k. It’s tax deferred. With tax deferred, you’re betting that your income will be less when you retire than when you are working, then you will be in a lower tax bracket, therefore you saved money on all the growth in the account. It’s a great strategy, and one I sing the praises of very highly. But no one knows what taxes will be in the future, and if the deficit continues to grow, you may be paying higher taxes on that money then what we pay right now.
That’s why my first child’s name will be Roth.
$5000 per year for 20 years @ 11.5% = $389,152.75 Not to shabby.
But when you consider that I only paid taxes on $100,000. And I get $289,152.75 tax free. . .
I think you get the picture.
