5 Reasons to Contribute to a Roth IRA in the Next 5 Days
April 10, 2014April 15th is just a few days away and while most people think of it as tax day, it’s also the deadline to contribute up to $5,500 (or $6,500 if you’re over age 5o or over) to a Roth IRA for 2013. Why is this so significant? Well, here are 5 reasons it’s a good idea:
1) You have nothing to lose. Unlike other retirement accounts, you can withdraw whatever you contribute to a Roth IRA anytime for any reason without tax or penalty so your money isn’t tied up. (However, if you withdraw earnings before you’ve had the account for 5 years or before you turn age 59 ½, they may be subject to taxes plus a 10% penalty.) You can even keep the Roth IRA in savings account or money market fund if you don’t want to take any risk with it.
2) Your money can grow tax-free. The main benefit of a Roth IRA is that anything you don’t withdraw can eventually be withdrawn tax-free as long as you’ve had the account for at least 5 years and are over age 59 ½. This is a good reason to invest your Roth IRA aggressively if you don’t need it in the next few years. You can also withdraw up to $10k of earnings (plus contributions) tax and penalty-free for a home purchase as long as you haven’t owned a principal residence in the last 2 years and have had the Roth IRA for at least 5 years.
3) You start that 5 year clock ticking. Notice that having the account open at least 5 years offered some benefits? The sooner you open that account, the sooner that 5 years will pass.
4) You’re less likely to raid it frivolously. While you CAN access your Roth contributions, you have to fill out a withdrawal form to do so. That and the fact that you’re technically raiding a retirement account that could otherwise grow tax-free may make you less likely to spend the money frivolously than if that money was just sitting in your savings account.
5) Roth IRA money is more protected. If you have a child that will be applying for financial aid in the future, money in a Roth IRA is considered a retirement asset and generally doesn’t reduce financial aid eligibility. In some states, Roth IRAs are also more protected from lawsuits. Finally, when you pass away, a Roth IRA can pass to your beneficiaries without going through the time and expense of probate.
So what’s the catch? Other than actually needing to have money to fund the Roth IRA, the main problem is that you may earn too much income to contribute to one. In fact, this happened to me this year when I discovered that my income only allowed me to make a partial Roth contribution. I ended up having to recharacterize my excess Roth contribution to a traditional IRA contribution. I was then able to convert that traditional IRA back into a Roth IRA, a technique called a “backdoor Roth IRA contribution.”
(You can do the same even if you can’t contribute to a Roth IRA at all by first contributing to a traditional IRA and then converting it into a Roth IRA. Other than the extra paperwork, the only downside is that you have to wait 5 years before being able to withdraw the converted amount without penalty. Also, be aware that if you have any other taxable IRAs, you’ll have to pay taxes on part of your Roth conversion. You can avoid this by rolling those other IRAs into your retirement plan at work.)
So if you’re fortunate enough to have some extra savings laying around, consider contributing to a Roth IRA. Remember, you only have until April 15th to contribute for 2013. What are you waiting for?