Now is the time to get a Roth IRA
Why is that? Simply put, with the new tax plan in effect rates are about as low as they are going to be. Quite likely the American Pendulum will swing back the other way over time and taxes will be raised. Why does that mean you want a ROTH IRA rather than an ordinary IRA?
The answer to that involves understanding the basic principal of an IRA. One puts money into a retirement account (IRA) to get a deduction on the current year’s taxes, but that means that all money taken out of the IRA is taxable as income (in general). This is an advantage given the assumption that you will earn more money and be in a higher tax bracket while you are working, then in a lower tax bracket when you retire. It is also attractive to reduce a current tax bill.
The ROTH IRA is essentially the opposite. One puts money into a ROTH IRA account but gets no deduction for the current year’s taxes, but NONE of it is taxable when taken out, including the gain if all of the rules are met. This is an advantage if you are likely to be in a similar or higher tax bracket in retirement. If tax rates are eventually raised again this is almost everybody. You may want to ask about this option.
There are other advantages to it without this situation. Especially if you are younger, haven’t started to earn high income yet, this money invested over time will be mostly money earned on the initial investment. Yes, that means you earn that money tax free.
The other major advantage has to do with what I call the Social Security Boomerang. When you start to draw on Social Security it is non-taxable if you don’t have enough other income (pension, draws on retirement plants, etc). Once you have enough income to tax your Social Security, the percentage of it being taxed increases until a maximum of 85% of it. This has the effect of possibly doubling your tax rate (every dollar of other income can make 50 cents to a dollar of Social Security taxable). Yes, they tax you on the money put into Social Security when you earn it and it is withheld, then they tax you again on it as you draw it if you have been able to earn a pension or save enough to draw on in retirement.
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