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Should I Invest in a Roth IRA

Should I Invest in a Roth IRA

The Roth IRA has been around for many years. Many people have heard about it and have perhaps thought about it. Roth IRAs are different from traditional IRAs because they are taxed at the initial creation. The law states that any interest growth from a Roth is not taxable to the individual. Traditional IRAs are 100% taxable. The argument for traditional IRAs was that the investor would be in a lower tax bracket when they retire. That may or may not be true. In an article by Bill Donoghue in MarketWatch (12/11/07) he stated "You will never retire on the money you save for retirement, you will retire on the money you make on the money you save for retirement." That indicates that due to the compounding of money, the money you make will be significantly higher than the money you save.

In an article in Kiplinger's Personal Finance (Sept 2009) it was stated "Roth IRA conversions are the silver lining to the economic crisis. These may be the lowest tax rates you will see for the rest of your life. And with account values down, it's a double sale". In another article in the Motley Fool (10/28/08) it was stated "for many, a Roth IRA conversion now is a good idea. But if you wait until the market recovers, you may will miss out on a great opportunity to cut your taxes forever."

In the Washington Post (12/31/06), "I think people of all ages should be thinking about Roth IRAs, especially those who are young. If you put pretax money into a savings plan at age 20 and leave it in until age 70 when you are required to begin withdrawals, you have been growing taxes for Uncle Sam for 50 years."

There are financial calculators on the internet which will help you to decide what is best for you. You can plug into some what if scenarios and find out what is best for you. Many of the advisers state that if you are under 50 you should for sure invest in a Roth IRA. Another however states that if your employer matches your 401(k) contributions, you should max out what is available there before investing in an Roth. If you can do both, you should definitely do so.

If you are converting a Non-Roth to a Roth IRA, in 2010 you may split the tax hit over two years. This is a great opportunity which should not be ignored. The other thing you should definitely do with your investments is make sure they are in the best possible growing funds available. Take advantage of the market as it comes out of the slump it has been in.

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Image by: Philip Taylor