Six Reasons Why Roth IRA Rocks

I love the Roth IRA. It is, in my opinion, one of the best and most convenient ways to save for one's retirement. I first started a Roth IRA in 2006 and have maxed it out ever since. Here are six reasons why Roth IRA simply rocks:

1. Your qualified distributions and capital gains are tax-free: You put after-tax money into the Roth IRA, and then your money can grow, tax-free, until withdrawal. We don't know what the federal tax rate will be in the future, but having a source of tax-free earnings can never hurt. Many people have traditional 401Ks (which are funded with pre-tax dollars and thus will be taxed when you withdraw in retirement), so having a Roth IRA provides important tax diversification.

2. Not dependent on employer (available to all with earned income): You can start a Roth IRA as long as you have earned income. In other words, this option, unlike the 401K, is not dependent on employer sponsorship. Currently, I am earning some freelance income while searching for a full-time position. I don't have access to a 401K, but I can put all my freelance income into a Roth IRA. This way, I make sure that I am still contributing to my retirement, to the best of my abilities, even though I am laid off. If you want to encourage your teenager to save, this is also an excellent method. A 16-year-old who earns $2,000 babysitting in a year can contribute all of that $2,000 to the Roth IRA. For added incentive, parents might provide matching funds,(say, 50 cents for every dollar saved.)

3. Spousal IRAs: Stay-at-home parents (SAHP) need to take care of their retirement needs too! Tax law allows a working spouse to contribute $5,000 a year (the current federal Roth IRA limit) to an IRA in the stay-at-home parent's name, even though the SAHP may not have earned income. If you are a SAHP, insist on having a Spousal IRA set up for you so that you have a way to access tax-advantaged savings.

4. Penalty-free withdrawal of contributions: You can withdraw your contributions (not gains) at anytime, penalty free. Ideally, you should leave your retirement bucks to work for you as long as possible, but in a pinch, the Roth IRA can also double as an emergency fund or a down payment.  

5. Variety of investment options: Think of the Roth IRA as a basket, and specific investments (stocks, mutual funds, bonds, etc.) as eggs that you put in the basket. With so many firms offering Roth IRA services, it's easy to select one that works for you. Those who wishes to invest in low-cost index funds can choose Vanguard, Fidelity, or Charles Schwab. If you want to select your own stock, brokers include Etrade and Scottrade. Many banks and investment firms also have Roth IRA options. Your 401K might be dependent on the investment choices your employer provides, but no such limitations exist with the Roth IRA.

6. Catch-up provision: If you are 50 or older, you can contribute an additional $1,000 in 2010. So, a 55-year-old worker can contribute a total of $6,000 in the Roth IRA. The catch-up contributions feature is a great way to accelerate your savings before your retirement years.