March 9, 2010

As I have blogged about in the past, the sooner you start saving for retirement, the more likely you will be able to live comfortably during it. Today I wanted to zero in on a type of retirement plan that can make your life a little easier down the road: The ROTH IRA.

A ROTH IRA is a type of retirement account that uses already-taxed money. What is the advantage to this? You don't have to pay the tax later as you will on your 401k, 403b and Traditional IRA. Often times people who are just starting their careers aren't saddled with a heavy tax burden - that will come later. They are at the bottom rung of the corporate ladder and with that comes a decent chance they are also in a lower tax bracket. This might well be the lowest tax bracket they find themselves in during the course of their life. By putting money into a ROTH they will be able to take tax-free withdrawals later in life when there is a good probability they are in a higher tax bracket. Couple this with the fact that tax rates as a whole are likely to go up in the future (someone is going to have to pay for all this government spending...and it's going to be us) and you have plenty of reasons to get the paying of taxes out of the way now.

Tax-deferred investments are an important part of retirement savings and I wouldn't tell someone not to contribute to their 401k (particularly if there is an employer match). But a ROTH IRA can be a nice compliment to your tax deferred savings and you will be thanking yourself down the road when you are taking a withdrawal that Uncle Sam can't get his hands on.

Steve Hicks

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).