I believe that overall a Roth IRA is an incredibly valuable saving vehicle to get started in. Yes, there are situations where it may not be for your exact situation, but for the vast majority they are great!
There is a lot of literature on Roth IRAs and comparing them to Traditional IRAs or 401(k)s, and that is not my goal here. Yes, if you are in a very high tax bracket today you may want to prioritize the deductibility of a pre-tax account. But there is one thing the Roth IRA provides that others do not.
The simple truth is that a Roth IRA can function uniquely as a backup emergency fund. Yes, you heard that correctly. The money that you contribute to a Roth IRA can be taken out tax free and penalty free before you turn 59 ½.
So to highlight an example, if a couple both contributed to their Roth IRAs each year over the next 6 years and they put $6,000 each into their individual accounts or $12,000 combined, they will have $72,000 in contributions and quite probably some growth. If this couple now has a major life event, they have an additional $72,000 in options available to them. From those contributions, that’s $72,000 in medical treatments for cancer just diagnosed; $72,000 to help during that unexpected layoff that went on for 2 years; and $72,000 to go towards a down payment on a house to make sure they don’t have to pay private mortgage insurance (PMI).
In short, that couple would have access to $72,000 in after-tax, penalty free options that other people who only have pre-taxed retirement accounts do not have. Do we want to recommend that you withdraw from a Roth for non-retirement – no! But is it nice to have options – yes! At the end of the day it is easy to do a cost benefit of Roth vs Non-Roth accounts monetarily, but we also need to consider the emotional side of investing and life as well.
The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Andrew Cremé and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
The examples included are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.
Earnings withdrawn prior to 59 1/2 would be subject to income taxes. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.