To Roth or Not To Roth...

Shannon L Compton for the HuffPo writes:  No, a Roth is not a new app for your phone that has super magical powers, or the latest fancy cupcake flavor from Sprinkles. It's also not a name of some rare African bug that you'd never want to come in contact with. If you are young, presumably under 50 years old, then a Roth is something you should become familiar with.

ROTH is a type of retirement investment account, much like its well-known cousin, the 401K. Unlike its cousin the 401K though, a Roth comes in two different flavors: Roth IRA, and Roth 401K. In the land of retirement investment options, the ROTH is a relative newcomer having been established by the Taxpayer Relief Act of 1997. There is a lot of talk about "to Roth or not to Roth" with arguments on both sides of the aisle.

Here's the nitty-gritty:

• A Roth is a post-tax retirement account, meaning the money you put in does not allow you to deduct it from your tax returns. That can be a bummer when you need income tax deductions!
• A Roth IRA has income contribution limits, so if you make over 127,000 if you are single or 188,000 if you are married, in 2013 you can't put any money in. Double bummer!


• A Roth is like the super sale at Macy's where you get 60 percent off, then you have a coupon and get another 10 percent off, and then you open an account and get another 10 percent off and you end up walking away with a lot of clothes without having to spend a lot. The power of a Roth is very similar -- you put in money that you've already paid tax on, and then take it out after it has compounded (mega growth), without paying tax on the growth if you are over 59 1/2. You can always take out your contributions tax-free. That's a win-win!


• If you are young, it's worth considering a Roth since tax rates are at the lowest they've ever been. Think about it, do you think your taxes will be higher or lower when you retire... if you are still thinking let me make it easier for you, HIGHER!


• Just like a traditional IRA, you can take out up to 10,000 as a first time home buyer for your down payment. There are rules to follow here, but just know that it can be done. You CAN'T do this with your 401K.

" To Roth"
There are a lot of positive reasons to use a Roth if you are young. The compounding of money (money growing on top of money growing on top of money) happens no matter what account you have, Roth, a regular 401K, or IRA. However, the beauty is that when you take money out from a Roth, you've already paid tax on it, so it goes directly into your pocket and not the taxman's (you must be over 59 ½ to take out your earnings tax-free.)

"Not To Roth"
With every good thing comes its nemesis. While it's great that you can take money out tax-free with a Roth, you don't get a tax deduction when you put it in. This may or may not matter to you and may or may not be good for you. Another point to keep in mind: Social Security was never set up to be taxed, and guess what, it's taxed. So, as the government digs deeper and deeper in debt, I wonder how long the Roth "tax-free" status will remain "un-touched". I don't want to get "conspiracy theory" on you, but it's definitely something to keep in mind.

If you choose to start a Roth, no matter what flavor you choose, make sure you consult with a CERTIFIED FINANCIAL PLANNER professional, or a CPA prior to making any kind of retirement plan decisions. Remember, for every financial decision you make, you need to start thinking Dollars & Sense!