Let’s be real for a minute. Most of us secretly believe we will win the lottery at some point or another, but deep down inside we also know that the likelihood of that actually happening are pretty slim to say the very least. However, we will also all have to face retirement at some point or another and most of us would like to do so in a comfortable way. That is where a Roth IRA comes in.
An IRA can provide a tax-advantaged way to save for retirement. For the 2013 tax year, investors can contribute up to $5,500 – or up to $6,500 for those ages 50 or older – to a traditional IRA or a Roth IRA. With a traditional IRA, you pay the taxes on the back end, and with a Roth IRA, you pay the taxes on the front end. Both types of IRAs allow your money to grow tax-free while it’s in the account.
Unfortunately, in a recent survey, a huge amount of people stating that they were not contributing to a Roth IRA, and that number has risen since last year. The question is – why?
The Tax Issue
For some people, it seems that they believe they could save more in different ways and that if they would use a Roth IRA, they would go over the tax free limit and end up having to pay money. However, there are a number of savvy ways to make sure you get the most out of your savings.
Most investors use money funds as parking places for cash that’s temporarily kept out of higher-yielding investments. But it’s no way to build retirement savings because money funds have offered returns barely above zero for the past four years.
Also, a recent news item suggested that Obama will now be targeting Roth IRA’s for taxation, which is one of the reasons why people try to stay away from them and are looking at other types of investment.
Obama’s 2014 budget proposes a cap on tax-deferred savings such as IRAs and 401(k) accounts. In his wisdom and with his executive powers, Obama can entitle the government to tax the savings that Americans put away for their golden years.
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The Gift of IRA
However, even though it is certainly true that taxation on Roth IRA’s may start to come into force, it is still very important to put some money aside for your retirement. After all, state pensions are pretty much non-existent and the amount of news on gaps in private pension funds will fill even the most savvy savers with complete dread. It now seems that a Roth IRA is becoming an interesting gift to give to your loved ones as well.
Contributing to a Roth IRA can also be a great gift for high school graduation. Kids of any age can contribute to a Roth IRA, as long as they’ve earned some income from a job during the year. A few brokerage firms and mutual fund companies don’t let minors open IRAs, but several firms make it easy to open an account and have low fees and investment minimums.
Generally, when you give a gift of Roth IRA in this manner, it is given to those who do not have the ability to save up so much money that it will be taxed. Besides this, it teaches them how to manage money and it prepares them for what is to come better than any other savings plan. We still live in difficult economic times, but these times will at some point get better. Being ahead of the game when that happens is a fantastic position to be in.