What is a Roth IRA?

Importance of Retirement Savings

Modern businesses rarely provide the pension plans or job security as they did in prior generations. With most Americans saving almost none of their paycheck, the fate of Social Security questionable, and large companies like Enron destroying the retirement accounts of their employees, it has never been more important to have an individual retirement account that you control.

The true power of retirement accounts is in the ability of the funds to compound interest without annual taxation. The most important factor in compounding is that of time. The earlier you begin saving, the more time your account has to compound. There are dozens of examples out there to show how saving 5 or 10 years earlier shows differences at retirement in the tens of thousands of dollars. Roth Accounts allow you to take control of your retirement planning and pick the assets you want rather than what your employer decides to offer you.

Roth IRA vs. 401k and Other Plans

A Roth IRA will ideally not be your sole retirement account. Hopefully your company provides a 401k, 403b, or other retirement account. Since company sponsored plans typically provide a match on employee contributions, there is no reason to miss out on that kind of return. Every star wall-street manager cannot come even close to the 50%, 100%, or even 150% match some companies provide each year on a portion of your pay. However, if you reach the amount your company matches and still want to save more, a Roth IRA provides an excellent place to continue saving. Since contributions to a Roth IRA are made post-tax, the dollar in your Roth IRA is worth more than the pre-taxed dollar in your 401k. And since you control exactly what goes into your Roth IRA, you can chose different funds, choose an annuity, or even hold Certificates of Deposit to compliment your other retirement account. After you meet your company’s match and then reach your annual contribution limit for the Roth IRA, you next best option is to continue to fun your 401k, even without the match. The tax benefits of these accounts far outweigh holding money in a taxable account for your retirement.

Other Retirement Accounts

There are many other ways to save for retirement while still receiving some sort of tax protection. While most companies provide 401k programs, there are also Roth 401k programs that allow post-tax savings sponsored by the employer, 403b plans for government-approved organizations, and traditional IRAs. Government savings bonds and tax-managed index funds are excellent ways to protect yourself from taxes in non-retirement accounts. Depending on your individual needs and income, any of these plans can help you save for retirement.