A lot of fans of the fabulous retirement account known as the Roth IRA have been saying that the glory days of not being taxed on withdrawals or contributions to the account may be over by the beginning of the coming decade. While there shouldn’t be a political divide on the matter, many who contribute regularly to a Roth IRA say that inevitable income tax changes will end up ruining what made this retirement account so popular since it was created by Sen. William Roth in 1997. As part of that year’s Taxpayer Relief Act, it was an example of the 1990’s being a lot better than where we are now and finding safer ways to invest our money for future retirement. It also beat having to deal with regular IRA’s where the IRS was more than willing to take away from you anything you decided to take out or put in.
Well, so much for retirement accounts in general if anyone has one left as of this writing. One of the advantages (or disadvantages) of Roth IRA’s was the ability to take your contributions out of the account before retirement age and not get a tax penalty. Now that many people likely have taken some out after losing their job or suffering from any variety of financial disaster, it might make you automatically think that the Roth IRA is quickly becoming a retirement investment of the past. The truth is, despite some possibility of Roth IRA’s being taxed eventually, it’s never too late to keep investing in this account.
Arguably, the Roth IRA is still the safest and fastest-growing retirement account of all, even though not a single member of the American populace have lived long enough to reap its fullest benefits yet if you happened to start one when it began in 1997. Just as with Social Security, the fantasy of going into the future to see what will happen to it when we’re all old, gray and supposedly comfortably retired is always there as we’re constantly told of our financial crutches being in danger down the road. With the dire predictions of Social Security’s demise always ringing in our ears, the Roth IRA may be our only saving grace decades from now if you don’t trust employer 401k’s either.
What happens, though, if we end up being taxed on anything we put into our Roth IRA’s and what we take out before retirement?
Chances are you’re going to eventually see yet another fight in Congress to keep that from happening and maintaining the Taxpayer Relief Act of 1997 that was perhaps the greatest gift to the American people via a U.S. Senator. Then you have the reality of how to pay for our earth-shatteringly massive deficits and the only route being taxation on things we never thought we’d live to see be taxed. Every proponent of Roth IRA’s say this account will be one of those targets, which means that taking any money out of your Roth IRA now is preferable rather than later when you could have to pay taxes on any of your removed contributions.
Keep in mind, though, if you cash out absolutely everything in your Roth IRA, you already get a penalty from the IRS, plus tax payments demanded on what you took out. That’s why it’s essential to only take out what you (yes, look in the mirror and point to yourself) put into your Roth IRA and not the interest generated. That’s a part of the fine print in the contract when starting one of these.
With all these possible drawbacks in cashing out an IRA earlier in future years when things might be even more financially bleak, never say never to a Roth IRA. If you’re thinking about starting one now, you’ll still find plenty of attractive things about it that will survive, even if it doesn’t become tax free…
The flexibility of a Roth IRA will be the first thing that’ll attract you. If you want to use mutual funds as the key to making at least a million by the time you’re retirement age, you can use that–or perhaps the slightly safer method of CD’s right through your local bank. There isn’t a thing that’s off limits in how to go about setting up your Roth IRA. With generally an 8% return, too, you can make a healthy amount by the time you retire, assuming you start one before you’re 40. Most financial planners will tell you that you should start investing when you’re in your mid 20’s in order to make the maximum by the time you’re 65. Don’t let that discourage you, though, from starting one if you’re well over that age bracket. Starting one even in your 40’s can allow you to have something significant in the bank when all else is up in the air.
If you’re one of the lucky ones making over $100,000 a year in America, then you might have fits dealing with a Roth IRA. As of this writing, you’re only allowed to contribute up to $5,000 a year to a Roth IRA if you make under $100,000 as a single person. That’s why it’s truly designed for every income bracket below those who received corporate welfare during the Bush Administration. Some might feel like giving up then if they can’t contribute $5,000 a year to their Roth IRA with the thought you can’t grow anything significant otherwise. Know you’re allowed to put in as much as you want each month (as long as you have a recurring income from a job), so keep in mind that if you can’t put in a lot now, you might be able to at later date and speed things up.
When dealing with the prospect of taxation on our Roth IRA’s, the best thing to remember is that when starting one of these accounts, it’s best to have an automatic withdrawal each month so you won’t have to think about wanting to cash it out. As with the stock market, staying in for decades is better than obsessing over the wild fluctuations each week and taking your investments out in a state of panic. Roth IRA’s will ultimately have to end up with that sentiment in time if you don’t want to face the wrath of the IRS in cashing out your money before you’re 59 ½.
An automatic transfer of a certain amount each month into your Roth IRA will help you leave it alone as it should be until you’re ready to retire. If you’re desperate for money before then during a financial emergency, the simple solution would be to dip into a savings account you should fortify concurrently with the IRA.
Unless we get taxation without representation on even our saving accounts, a savings account is the saving grace in leaving us less vulnerable to dealing with other taxation on cashing out our retirement funds…that would ultimately leave us with less money to work with during financial duress…