This question was posed to me by a friend the other week on the golf course. My immediate response was, it’s always a good time for a Roth. Upon further reflection though I had to ask myself, why did he ask this and why did I answer that way. In the end, I think the question asked and the answer given represent basic misunderstanding and very boring advice.
People often tell me they have a Roth so they’re doing well. A Roth IRA is simply a type of account with special tax rules. A short summary is they are funded with after-tax dollars (no tax deduction today), earnings are not taxed inside the account, and withdrawals after age 59.5 are not taxed either. Once the Roth IRA is opened and funded, it can be invested in various ways.
Many people will open a Roth IRA at a bank and put money into it. This is good except it may only be earning interest in line with a checking or savings account. This may not even keep pace with inflation. In order to increase the benefit you receive as an investor, it is important to invest the contributions into investments with the opportunity to grow, and pay dividends or interest. This would likely include mutual funds, ETF’s, stocks, and bonds. Over the long run, these earnings will far outpace the interest in a savings account and keep your future purchasing power ahead of inflation.
The reason I am so excited to hear people have an interest in Roth IRA’s is more to do with a general interest in investing. I frequently encounter people who are not saving for the future or who are near retirement and have under saved. There are several reasons why I advocate for people to invest in Roth IRA’s if they meet the income guidelines:
Investing with a purpose is important to help make your goals feel more tangible. Maxing out an IRA is a great goal (in 2018 the max per person is $5,500 and $6,500 if you are over 50).
Investing just $100 per week will almost max out an IRA each year. This is an amount many people are comfortable with. You don’t have to contribute the max. Something is better than nothing.
Maxing out an IRA for 30 years and earning normal market returns can equate to almost $1 million at retirement (assuming an annual return of 10% and annual contributions of $5,500).
Lastly, you can do this outside of your employer sponsored plan at work. You have complete control of where your IRA is held and what it invests in.
There may be additional benefits based on your personal situation. If your income exceeds the IRS limits there may still be opportunities to participate in non-deductible IRA’s, Roth conversions, or backdoor Roth’s. Choosing the right mix of funds will be a personal decision and is not easy. Some investments already have built in tax benefits like annuities. These are often pushed on unsuspecting investors to be bought inside an IRA which negate the tax benefits of the annuity. They tend to pay high commissions to the sales person and high fees to the investor. To help navigate these waters, it may be best to worth with a CERTIFIED FINANCIAL PLANNERTM professional who is also a fiduciary.
Funding an IRA is available to everyone with an earned income. It is a type of account so market conditions will not influence the benefits. In other words, Roth IRA’s are great savings and investment vehicles and it’s always a great time to save and invest.