The Roth IRA.

The Roth IRA was established by the Taxpayer Relief Act of 1997 and was named for its chief legislative sponsor, Senator William Roth of Delaware. The primary advantage of the Roth IRA is the tax-free accumulation of earnings while the primary disadvantage is the requirement that after-tax contributions are used to fund the account.

There are two types of IRA plans – Roth and traditional.  Both plans share the same contribution limits, and the distribution requirements are somewhat similar. To take tax-free distributions from your Roth IRA, the account must be held for a minimum of five years and you must be at least 59½ years of age. There are a limited number of specific exceptions (like a disability or the purchase of a first home) that allow for early withdraws.

For those individuals in the higher tax brackets, the primary premise is the assumption that the U.S. Federal income tax rates will eventually increase. This belief is often the main criteria that is used in the decision to fund a Roth IRA.

The decision to leverage the benefits of a Roth IRA really comes down to personal bias, the availability of discretionary income, current debt and savings levels, current pre-tax contributions to existing retirement plans as well as your willingness to defer distributions for a substantial period of time in order to reap the benefits of time value of money.

Over the years, I have witnessed the realities of life. With the loss of a high paid position after years with the company, one is suddenly faced with the daunting task to replace lost income. Expenses associated with homes, automobiles, and debt must be paid while accumulated savings are neatly tucked inside accounts that typically cannot be accessed without incurring taxes and penalties.

What is true for me is that we not lose sight of the overall objective – moving towards the goal of being financially self-sustainable. And for most of us, isn’t the overall objective to maintain a sustainable standard of living that is free from the financial and emotional uncertainties of life?

Certainly, no one wants to have to pay more in taxes than is necessary. But what is the value of knowing that you can access your savings, free from additional taxes and penalties, when faced with a life shock?

Before making any decisions, be sure to take time to create the necessary space that is needed in order to consider all of your savings options. You never want to find yourself making the statement “I sure wish I knew then what I know now.”