Oh man, you all know how much I love Roth IRAs, right? Well Jeff Rose, a CFP, snazzy dresser and fellow Cross-Fitter, who blogs over at Good Financial Cents, reached out to what turned into over 140 superstar bloggers (and me too) to start a “movement” to spread Roth IRA awareness around the Interwebs.
You can check out his reasons in his post but basically he was speaking went to his alma mater and a bunch of seniors had no idea what a Roth IRA was. “No es bueno,” if you ask me. So I quickly jumped on board to further spread the word to both of my readers… wah wah wah
Anyhow, I can’t tell you how excited Jeff was to have me on board. I mean, he just couldn’t contain himself – how can you call it a movement without Step Away from the Mall, right?! ;) Haha! Seriously though – there are some pretty “pimp daddy” bloggers on the list, so check out Jeff’s site for what I assume will be a bunch of more interesting and informative posts from some kick-a$$ bloggers. In the meantime, enjoy my two cents. Keep the change.
Because I linked to my top three reasons why I love Roth IRAs above (and here again) for you to check out at your leisure, I want to focus today on two pretty annoying excuses that silly, underachieving and just average-looking people use for not investing in a Roth IRA and why I ignore that “dumbassity” and pile as much money as I can (currently $10,000 per year) into Roth IRAs. (If my work ever offered a Roth 401(k) I would keep piling in the money there, too.)
For brief background, the prettiest thing about a Roth IRA is that you don’t get a tax deduction for putting money in. (You read that right). Because you don’t get a tax deduction on the money, the government has agreed to never tax the money again (even the growth) as long as you “respect the Roth laws” (basically, leave the money in until you’re 59 1/2 and you’re good to go…). So you pay taxes on the 5 grand now and that’s it.
Other retirement accounts like traditional IRAs and 401(k)s give you a tax deduction now for what you contribute. But when you take money out in retirement you’re taxed at whatever your ordinary income rate is at that time for all of the money – growth, too. So if you put $5,000 in you get a tax deduction for $5,000, which if you’re in the 25% tax bracket saves you $1,250 in taxes this year. But you then pay income tax on all of the money, including growth, when you take the money out.
So some silly folks think it’s a dumb idea to invest in Roth IRAs because:
1. “I’ll be in a lower tax bracket in retirement when I take the money out, so I would rather pay them later.”
Really? First, how do you know? Second, if you really think you’ll be in a lower tax bracket in retirement you’re not trying hard enough. Seriously. I’m no tax expert and hate paying taxes as much as the next guy, but in order to be in a lower tax bracket in retirement you basically need to be broke or have all of your money in tax sheltered accounts (like Roths…)! Great job aiming low, jerks! :)
Also, even assuming you might be in a lower “tax bracket” you have no way of knowing what the “tax rate” for each bracket will be. Your taxable income could be half of what it is now, but the tax rate for it might be even higher! (We do have a bunch of debt to pay back… using tax dollars, right? So if you were to bet which direction would you think tax rates would go over the long term? I thought so.)
This is why I ignore all of this “I’ll be in a lower tax bracket when I retire” noise. Just spend less than you make and pile as much money as you can into savings and investments. Do this for decades and you’ll be rocking it. And you can count me as one guy making sure at least some of my pile will never be taxed again. Don’t let some hypothetical concern (that’s based on very little logic) about your “tax bracket” twenty years from now hold you back.
I’d much prefer to have tax certainty than some crazy “what if” scenario. And when I ran the numbers, if I stick $5,000 in a Roth IRA every year and invest in an index fund that mirrors what the Dow Jones Industrial Average returned for the twenty years ending on December 31, 2011, including dividends, I’ll be staring at a cool million bucks 33 years down the road. That’s right, an auto-pilot million dollars (see here for details). Of course, what happened in the past can never predict what will happen in the future, but you get the point… I’ll take “never be taxed again” over “what if I’m in a lower tax bracket” any day of the week.
And here’s the second dumb excuse to not have a Roth IRA:
2. What if the government changes the Roth rules?
What if they don’t, jerk? But to address the question, I highly doubt they will. You already paid taxes on the money you put in and it would be an incredible mess to undo what they did. Also, until very recently when they lifted the income limits for converting a traditional IRA to a Roth, pretty much everyone who invested in Roth IRAs was a “middle-income American.” Good luck getting reelected if you start taxing Roth distributions… Get the point? Roth taxes would be very far down the list to mess with if you ask me.
So stop the excuses and just start saving. The only real negative that I can see with a Roth IRA is that they only allow $5,000 per person or $6,000 if you’re over 50. That’s right – the worst part about the Roth is that you can’t put enough in it!
Readers: Have you maxed out your 2011 Roth IRA? If you haven’t filed your taxes yet, there’s still time! Now get saving. Who’s with me?
Ok – now that you know two crap excuses for not having a Roth IRA, you’ll be equipped to tell the doubters why they’re just plain wrong!
Until next time, put your credit card down and slowly step away from the mall!
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