3 Good Reasons to Open a Roth IRA

Source: Thinkstock

Source: Thinkstock

There’s no hiding the fact that the financial system is a jungle, complete with quicksand, predators, and those who just want to chop it all down. Negotiating the terrain can be difficult even for those with experience, and it is easy for anybody to get lost. Every day we hear stories about people disappearing or re-emerging: families that have been foreclosed on or those finally paying off a student loan.

Like it or not, most of us have to interface with the financial system, and we have to understand it in order to plan effectively for the future. The financial system services our regular banking needs, it finances our home and auto purchases, and perhaps above all it supports our retirement system, shoddy though it may be.

Fortunately, retirement accounts like a traditional or Roth Individual Retirement Arrangements (Roth IRAs) are pretty straightforward. These accounts are designed to encourage people to invest in their own retirement by incentivizing saving. Traditional IRAs allow people to take a tax deduction for putting money away, allowing them to simultaneously save for retirement and lower their tax liability. In the business, we call that a win-win. Investments in a traditional IRA grow tax deferred and are taxed only when they are withdrawn.

Roth IRAs are a little more involved. They flip the tax mechanic around, meaning you pay taxes on the contributions you make, but withdrawals are not taxed. If you don’t have a Roth IRA, here are a couple of reasons why you might want to look into one.

1. Recent retirees

Just because you’ve retired doesn’t mean you have to stop saving for retirement. The cutoff age for contributions to a traditional IRA is 70.5 years, but there is no age limit for a Roth IRA. However, income stipulations still apply. You have to have earned some income during the year in order to contribute, even though you’re contributing after-tax income to begin with, and income from investments and pensions doesn’t count. This applies if you retired in the middle of the year, for example, or you picked up freelance gig for old time’s sake and didn’t immediately blow the money on a vacation to Mexico.

If you aren’t earning any income but your spouse is, they can make contributions to your retirement account on your behalf — and keep in mind that if you’re over the age of 50, you qualify for catch-up contributions. For 2015, the standard contribution limit is $5,500 and the catch-up limit is $6,500.