A few weeks ago Jeff Rose, a fellow blogger and certified financial planner was asked to give a speech at his alma mater, Southern Illinois University. He was talking to a group of college seniors about saving and investing.
He discussed the benefits of investing in an IRA, in particular a Roth IRA. But when he took a poll of this group of more than 50 students not one of them had heard of a Roth IRA.
Not one person. Holy cow!
Clearly this was an investment vehicle that was not on the radar of these young adults. So Jeff decided to do something about it. He created the Roth IRA Movement.
Source: goodfinancialcents.com via Jeff on Pinterest
This movement happens today with over 140 bloggers writing about the Roth IRA. I am joining in with this article. I am a big believer in the Roth IRA and IRA’s in general so I am happy to bring more awareness to this topic.
What is a Roth IRA?
The Roth IRA is named after Senator William Roth of Delaware who was the driving force behind this new kind of retirement account that was established in 1997. The big difference between a Roth and a traditional IRA is how taxation is treated. With a Roth IRA you cannot deduct any contributions from your taxes, you have to use after tax dollars.
Why would you want to do that? The big reason is that when you start taking distributions (as in withdrawals) from your IRA you take these distributions tax free in a Roth. With a traditional IRA you must pay taxes on your distributions just as you would with any other income.
Regardless of which IRA you have, just like a 401(k) your money grows tax-free every year. You never have to report any interest or capital gains earned on your taxes.
Who Can Contribute to a Roth IRA?
To be eligible to contribute to a Roth IRA a person must meet certain income requirements. You must have some kind of job with earned income and not rely on income from investments. Also, there are certain limits if you have a high income. Limitations start to kick in at $105,000 annual income for single people and $169,000 for couples filing jointly.
If you meet this criteria then you can contribute but the maximum amount depends on your age. If you are under age 50 then you can contribute $5,000 per year, for the 50 and over crowd that number increases to $6,000 annually. You can contribute to your IRA even if you also have a work 401(k) or 403(b).
Why I Love the Roth IRA
In 2010 I converted most of my traditional IRA investments into a Roth IRA. I am paying taxes on this conversion but I did it for a couple of reasons. I believe that taxes are only going to increase over the next couple of decades and I want to pay taxes at today’s rates and not at the tax rate in 20 years. Plus, I expect my account to grow significantly during this time period and so I expect to pay less total tax by paying it now even allowing for inflation.
The Sorry State of Retirement Savings
According to the annual Retirement Confidence Survey 60% of Americans have saved less than $25,000 for retirement. That number is startling to me. We are living longer lives but we are not going to be able to pay for it.
So, even if you have a 401(k) at work I highly recommend you also open and contribute to an IRA. While the best thing you can do is to invest enough in your 401(k) to receive any employer match, once you have maxed that out an IRA should be considered.
The great thing about an IRA is that they are flexible. With a work 401(k) you often have limited choices with sometimes just a handful of investment funds to choose from. Often these investments have high fees associated with them.
When you open an IRA you have almost unlimited choices. Pretty much every major mutual fund company and stock brokerage offers an IRA account. Of course, I recommend you consider p2p lending which is another option for every investor.
You Can Open a Roth IRA at Lending Club and Prosper
When it comes to p2p lending all your earnings are fully taxable. So, to get the full benefit of the great returns available here you need to invest through an IRA.
Lending Club has had an IRA option for some time now and Prosper recently made an IRA available as well. You can open an IRA with a minimum of $5,000 at either company. Personally, I believe the Roth IRA is the best way to go for most investors, but you should talk with a CPA or other finance professional before taking any action.
But please, take action. If you are earning an income, even if you are young (especially if you are young), you should be investing money in an IRA every year if at all possible.
You Can Even Win $5,000
So, the Roth IRA Movement is not just about educating the public, you can also win free money. Jeff Rose has teamed up with some other bloggers and the people at IRAmarket to give away some free money. There is a $5,000 giveaway and all you have to do is Like one of these bloggers as well as IRAmarket on Facebook. Pretty easy.
Make Your 2011 IRA Contribution Soon
You have until April 17th to fund your IRA for 2011. If you are opening up a new Lending Club or Prosper IRA I would allow at least a week or so for them to process the paperwork in time. So get to it. Of course, you can always fund your 2012 IRA any time this year.
It sounds like our Canadian TFSA?We have had the tax free savings account for a few years and Canadians are just warming up to it.We are just getting ready to roll out an Impact Investment Bond geared to this market.We provide car loans for the unbankable.Great site and fanatastic ready.
@Dave, I don’t know much about the Canadian TFSA’s but they do sound quite similar to an IRA.
Has LC made it easier to set up an IRA. Last time I looked into it the custiodian they were using was terrible.
@Charlie, I am not sure when you last looked but Lending Club did make a change last year. They now use SDIRA Services and they are much better than the previous custodian in my opinion. While it is still not a seamless process it is relatively easy.
how safe is the IRA with LC?
While there are certainly risks to an investment with Lending Club it is a lot safer than it was when this article was written. Lending Club is about to go public and will have a huge cash warchest within a month or two.
I obviously don’t know your financial situation so cannot provide investment advice here I can give you my opinion. A Lending Club investment has shown predictable positive returns for many years now and I think it is one of the best risk/reward investments available today.
A few other advantages I like about the Roth IRA is that you can withdraw your contributions at any time penalty and tax free. (Note any gains have to remain in the account until you are 59 1/2 or older.) Unlike traditional IRA’s, you do NOT have to take mandatory distributions when you reach age 70 1/2, and you can keep on contributing in retirement.
@Storm, Good points that I didn’t mention. These are both great benefits of the Roth IRA particularly being able to withdraw your contributions without penalty.
Thank you Peter!
Watch out for all the hidden fees with Millenium Trust, the custodian for Prosper. They charge you a $30 paper invoicing fee and don’t even have an electronic invoicing option.