Reasons for using a Roth IRA.

I’m basically responding to a comment posted in the HQ Net Worth page:

“WTF? When are you planning on retiring?”

I guess the comment was directed at my funds in my retirement account (Roth IRA).

Eligibility

Roth IRA: Single filers up to $95,000, join filers up to $150,000 (for full contributions

Traditional IRA: Under 70.5 years old, no income limit

Note: Both of them require that the funds be salary from job. So you can’t just use money lying around.

Maximum Annual Contribution

$4,000 or 100% of salary. There are additional “catch up” contributions for individuals 50 and over.

Contribution Deductibility

Roth IRA: Since these are post-tax dollars, contributions are not tax deductible.

Traditional IRA: Deductions may be tax deductible.

The idea with a roth is you pay taxes now rather than later. This is perfect for me because I’m a student and my limited income is already taxed at the lowest bracket.

Federal Tax Advantages

Roth IRA: Tax-free growth
Traditional IRA: Tax-deferred growth

Withdrawals

Roth IRA: Can withdraw contributions anytime without penalty or tax*.
Traditional IRA: May withdraw without penalty anytime after 59.5 years of age.

With the roth you can withraw your contributions after 5 years if you meet one of the following requirements:

1. you have attained the age of 59½
2. you die (well, you don’t withraw personally.)
3. you become disabled
4. to pay for the purchase or construction of your first home ($10,000 lifetime maximum)

#4 is the best reason for me to use a Roth IRA since in 5+ years I’ll hopefully buy my first home and the contribution I take from the Roth IRA will be tax-free.

Conclusion

According to various articles like this one at moneychimp. A traditional IRA *may* equal a roth IRA but will never surpass it. So I suggest choosing the roth IRA over a traditional IRA. The fact that you don’t get to deduct contributions to your roth IRA is purely psychological. It’s not simply a matter of pay now or pay later, but a roth IRA can easily exceed a traditional IRA. One of the best benefits that applies to young people is that you’ll be able to withdraw funds to purchase your first home. Even if you aren’t young anymore, you should consider a roth IRA.

So in essence I don’t plan on retiring anytime soon in response to the comment, but at my current tax bracket, it is still very beneficial to use a roth IRA even at my young age.

If you’re interested in a Roth IRA, do you research. Here are some great places:

Moneychimp 1 2
About.com 1 2