Wednesday, February 12, 2014

Generation Roth: Millennials Discover The Secret To A Tax-Free Retirement

Ashlea Ebeling for Forbes writes: During a visit to a Pennsylvania steel plant recently President Obama touted the flexibility that his gimmicky new myRA account provides young workers just starting to save. “In an emergency you can withdraw contributions without paying a penalty. So it’s a pretty good deal.”   Fact is, myRA is just a Roth individual retirement account with training wheels; the full, grown-up version is an ideal savings vehicle for millennials, including well-paid ones who also have a 401(k).
A Roth IRA has two main advantages for younger folks. Money you contribute to an old-fashioned, pretax IRA or 401(k) isn’t taxed now, but all withdrawals in retirement are taxed at high ordinary income rates. Roth IRAs work in reverse: You get no tax deduction for your contribution, but withdrawals after age 59 are tax free. By then your income should be higher, in real dollars, than at, say, 25, so your tax rate is likely to be higher, too, making the back-end tax break more valuable than the front-end one. A Roth could also shield you from a growing list of tax and benefit penalties on higher-income retirees. (See Romney IRA: Exit Strategy by William Baldwin.)
The second big selling point for a Roth IRA is flexibility. Retirement is decades away and you might need cash sooner–to start a business, pay the rent while you return to school or, as Obama suggested, for an emergency. Take money out of a pretax IRA or 401(k) before retirement and you can get hit with a 10% early withdrawal penalty, as well as ordinary income taxes. (There are ways you might be able to avoid the penalty, but an estimated 5.7 million folks still got stuck paying it in 2011.) [snip]