Is starting a Roth IRA a good idea? This is one of the primary questions people ask when thinking about saving for retirement.

The Importance Of Starting An IRA

Certainly, starting an IRA is a crucial move and a good idea for anyone who is getting older - and that is everyone! Retirement age will creep up on you before you know it, and starting an IRA is an easy way to increase your retirement savings. On the other hand, it is never too late to start saving for retirement.

Starting the best type of IRA for you requires an understanding of the choices available - a traditional IRA or a Roth IRA. Both have advantages.

Regular IRAs

Traditional Individual Retirement Accounts have been around since 1981. Taxpayers can contribute up to $4,000 per year of earned income into an IRA. These contributions are tax deductible in the year they are made. Taxes on the earnings on the account holder’s contributions are deferred until they are paid out to the account holder, which cannot happen until the account holder reaches the age of 59 and one-half years.

Roth Individual Retirement Accounts (IRAs)

Roth IRAs are much newer than traditional IRAs - they have been around since 1998. Single taxpayers who earn more than $116,000 and married taxpayers who earn more than $169,000 cannot contribute to a Roth IRA. So if you earn that much and you are asking yourself, “Should I start a Roth IRA?” the answer is definitely no because you cannot. For both single and married taxpayers who earn more than $101,000, there are phased reductions in the amount an individual can contribute to a Roth IRA.

For those of us who aren’t stopped by the earnings limit associated with Roth IRAs, we can contribute to a Roth IRA. Unlike a traditional IRA, the contributions an account holder makes to a Roth IRA are not tax deductible in the year in which they are made. By contrast, the amounts of contributions, and the income they earn, are not taxed during the account holder’s lifetime. If the law allows you to start a Roth IRA, the answer to the question, “Should I start a Roth IRA?” is most certainly yes.

If you earn well under the income cap now, it is quite probable that you will reach the earning limit during your career, and then you will wish you had taken advantage of the Roth IRA when you had the chance to do so. Unless tax laws change significantly, a Roth IRA is one of the best investments you can make. So repeat after me: I should start a Roth IRA. I should start a Roth IRA. I should start a Roth IRA.

Investments In Your IRA

Remember that any Individual Retirement Account is only as valuable as the investments contains. Think of your IRA as an envelope that holds your retirement investments. What you choose to put inside the envelope is up to you.

Diversification is important. Most financial advisers suggest a blend of bonds, small capital stocks, large capital stocks, and mutual funds made up of shares in domestic companies and international companies. However, a mutual fund can also hold other kinds of investments.

Generally speaking, whatever you choose to invest your IRA dollars in, you should invest for the long term when you are younger and shift to more conservative investments as you age. That is because investments are cyclical over long periods of time, based on the national economy. You don’t want to be caught short at retirement time or have to work longer than you had planned to because an economic downturn cycle occurred when you happened to reach retirement age.

Everyone Who Is Eligible Should Start a Roth IRA

The benefits of a Roth IRA over a traditional IRA are enormous: limited contributions vs. no limit on contributions; deferred tax on earnings vs. no tax on earnings. There is virtually no downside to starting a Roth IRA.

Tags: retirement investing