Note: uhm, I've been slacking at blogging lately. WHOOPS. I blame this on 1) it's summer, so I really don't want to be inside on a computer when I could be at the beach instead (we've taken 3 day trips to the beach so far this summer... yassss) and 2) I've been helping my cousin build a website of her own for a book she wrote about breast cancer- I will post the link as soon as it goes live! Anyway I took a good long break from blogging. BUT HIIIII I'm back again :)
My lovely older brother suggested (3 months ago- after I wrote THIS post about how saving isn't always glamorous) that I should write a post about why I'm choosing to invest in a Roth IRA.
So, 3 months later, here I am taking his advice and writing a post about my thoughts on Roth vs. Traditional IRAs and why I chose a Roth IRA.
(note: I'm going to refer to Roth and Traditional IRAs throughout this post, but there are also such things as Roth 401ks- so if your employer offers that option for your 401k, this same principal applies. But make sure you research the Roth 401k on your own, too!)
Before we get into my thoughts on Roth IRAs, let's make sure we're on the same page with these terms... what does "Roth" mean, anyway?
What is a "Roth" IRA?
The money you contribute to a Roth IRA is AFTER tax. When you withdraw the money from the Roth IRA in retirement, you do not pay taxes on it (since you already paid taxes on the money that you contributed)
Pros of Roth:
- if you think your tax bracket is LOWER now than it will be in retirement, a Roth IRA is a good idea- pay lower taxes now rather than higher taxes later.
- You can withdraw the money you contribute (not the gains) without penalty. I wouldn't particularly recommend doing this (I think it's a good idea to just look at retirement accounts as FOR RETIREMENT, not as something you can withdraw from) but that means you can use a Roth IRA as an emergency fund, if you want.
Cons of Roth:
- Does nothing to reduce your taxes right now.
What is a "Traditional" IRA?
The money you contribute to a Traditional IRA is BEFORE tax. When you withdraw the money from the Traditional IRA in retirement, you DO pay taxes on it (since you didn't pay taxes on the money you contributed)
Pros of Traditional:
- Since the contributions are pre-tax, you're allowing the amount you'd pay in taxes to grow for 50+ years. If that sounds confusing, you would be correct. It's a weird concept. I really like this post in the MMM Forum that explains it pretty well.
Cons of Traditional:
- You have to pay taxes on the withdrawals in retirement.
- No way to take the money out if you need it before age 59.5 (well, unless you pay penalties)
Common Advice is...
Many articles you'll see say that as a "young person" you should invest in Roth because you're "at the lowest tax bracket you'll ever be in". The thinking is that you're at the very bottom rung of your career and therefore, you are making practically no money, so your income (and therefore your tax bracket) will be higher in retirement.
However, I completely disagree with that logic. I, for one, am making way more than I need to live off of. In retirement, I do not plan to be making (or withdrawing) this much money-- I would theoretically only be withdrawing the amount of money I need to live off of, which would put me in a lower tax bracket in retirement.
The "young people" this advice generally refers to are those in the lowest tax bracket- 10% or 15%. (for single filers in 2016, that's making an annual income of under $37,650) But many of us "young people" are actually making fairly good money, and may be in higher tax brackets. Just because you're young, that doesn't necessarily mean the Roth is ideal for you.
So, what am I (Ashley) doing with my money?
With all that said, I am contributing to a Roth IRA, and here's why:
- I'm all for diversity in investments. A large majority of my retirement funds are in traditional retirement vehicles- why not switch it up? And really, the amount that will be in Roth is pretty low- at the end of this year I'll probably have ~15% of my total retirement savings in Roth, ~85% in traditional.
- Who the heck knows what will happen with taxes in the future? I'm not going to lie, I really don't understand taxes nor do I trust that they'll always be at these levels. What if tax brackets skyrocket by the time I retire? Unlikely, but in that case, it will be nice to have a bit of money that I know I don't have to pay taxes on when I withdraw it.
Bottom line: Decide what's right for YOU.
Personally, I am still going back and forth on this. Researching this post kinda swayed me back towards preferring Traditional IRAs, but I'm not sure if that's the right answer. And really, since this stuff is based on predictions for the future, that means you won't know the "right answer" until we get to that future date and can look back and say "oh dang it, yep, really should have done the other IRA instead..." :)
Take some time to research this for YOUR situation! Please don't take this post as the be-all-end-all; it's just a brief overview of the options. Go out and research for yourself! I really liked this post on NerdWallet about Roth vs. Traditional IRAs- it's wayyy more in depth than I got here! Also, here's an interesting post by Financial Samurai on why NOT to contribute to a Roth IRA. There are a LOT of posts on the internet about this stuff. Educate yourself and decide what makes the most sense for you. (but be sure to not get so far into the research that you never make a decision-- it's better to invest in an IRA now, even if it turns out to not be the "right answer", than to be so overwhelmed by the decision that you put it off for 5 more years)