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Roth IRAs: An Opposing View

Meet the new writers! Our next new writer is Drew. Drew has always had a fascination with varying strategies for handling finances and economics throughout the world. He loves to travel and has a goal of reaching all 50 states and at least 30 countries before he hits 40 years old. He is currently pursuing his MBA, and has a primary goal of retiring from the corporate world by his mid forties. You can read more about Drew in his bio [1]. Welcome Drew!

Roth IRAs: My Views

One of the first topics that I have been asked to write about is my views on the Roth IRA. I have a Roth, and I don’t discount the benefit of a structured retirement account. However, there are some limits on the usefulness of this retirement vehicle. Growing funds tax free is definitely a benefit for those that have a need for future retirement.

There are some things which don’t make sense if you have certain situations which make a Roth IRA not as beneficial as you think. If you get the benefit of being below the Adjusted Gross Income (AGI) [2] requirements and getting the retirement savers tax credit [3] you might make things a little better for yourself. The flip side is that if you make too much, you cannot contribute [4] to a Roth IRA.

Who am I?

So let’s see how this applies to me. I am a 37 year old professional who is a single parent who files as head of household [5]. I make more than $42,375 in AGI every year, thus I get no tax credit from owning a Roth. I on the flip side typically make more than the low limit for Modified Adjusted Gross Income [6] (MAGI – your income, minus a few things, but none of your deductions like AGI). So what does this mean for me? I cannot contribute to a Roth, and get no tax benefit from contributions to a Roth.

Roth IRAs: Why They Don’t Make Sense for Me

So what does this mean for me? I define retirement a little different than most people. I strive to work as hard as I can and then leave the corporate realm. I might go back and do something else but the reason is not for earning the paycheck, but for the fun of it. This is where the problems with structured retirement plans come into play. Yes you can take out your contributions [7] (just the contribution amount) tax free, but you cannot take out any of the profit. Therefore part of your retirement savings is sitting and cannot be touched until you hit retirement age (unless you want to pay the fines and taxes [8]). One of the mantras that I have heard over time is never take your principal out of an investment unless you are cashing out. Taking the principal out of the accounts will leave less money to grow on, and thus have less money in the future of your accounts. Well think of it this way, you are leaving behind the earnings that you have earned and it is sitting in your account for decades until you can touch it when you “legally” are able to retire should the government not change the official retirement age of retirement vehicles (which again they are talking about).

As with many of the government laws that are created, they use the broad brush stroke approach and apply to the lowest common denominator. This means that while IRAs are a benefit for those who are not disciplined in their retirement finances, it hurts those of us who are disciplined. Since I plan on retiring early, gaining access to my retirement accounts will be a necessity so that I can actually maintain my living standard. There are other things which will help (namely paying off all debt, mortgages, etc.) as well as having enough “money” to live off the interest/dividends that you will earn year over year.

How I Save for Retirement

So what am I doing to combat this as I have to save for retirement, but don’t use Roth or other retirement accounts (unless they make sense)?* I do a majority of my “savings” with a taxable account and therefor have a couple of different options that apply to the future. Don’t get me wrong, I have a rollover IRA (from former 401ks), a Roth IRA, and a couple regular taxable accounts. This means that I can have access to some (depending on how much is in which account) of my money, yes it is taxed, at any time I want. Should I retire at 45 or 55 or 65, I can get access to the majority of my money and go on a world cruise and not have to worry about taking the money out of my retirement accounts with tax liabilities when I retire early. There are other issues at play here, but that is for future articles.

*Such as when the tax benefits work if I don’t make too much income, or I have a company matched 401k, etc.

Do you favor Roth IRAs or taxable accounts?

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