Reasons to Contribute to a Roth IRA

July 04, 2013

In his blog post this week, Scott Spann wrote about some reasons not to contribute to a Roth IRA. But there are also lots of reasons a Roth IRA can make sense. Let’s take a look at each of his arguments:

You will be too tempted take out your contributions early. I see the fact that you can access your contributions at any time and for any reason without tax or penalty as a benefit. After all, you never know what emergency can arise. It also allows people to save for emergencies and their retirement at the same time.

I would also argue that you would be less tempted to dip into a Roth IRA for frivolous purposes than a regular savings account. First, the Roth IRA is naturally segregated from your other money. Second, you have to complete a withdrawal form to access your money and that extra step can make you think twice about whether you really need the money. Finally, you’re consciously depleting money that could grow tax-free for retirement.

The human capital effect outweighs investment opportunity cost.  This may be true in some instances but a Roth IRA actually makes a great place to save money you plan to use to go back to school since the earnings can also be used penalty-free for qualified education expenses. If you end up not needing the money, it can grow tax-free for retirement.

Tax rates may not go up. With tax revenue near historic lows and government spending projected to skyrocket due to the retiring of the Baby Boomers, medical costs rising faster than inflation, and our ballooning national debt, tax rates are probably more likely to go up than down by the time you retire. Since you probably already have pre-tax money from employer-sponsored plans, it may be a good idea to hedge your bet with a Roth IRA.

Your tax bracket may not be higher. Yes, other income may be taxed at lower rates but it’s hard to beat zero. A Roth IRA can also reduce the amount of your Social Security benefits subject to taxes and keep you in a lower tax bracket overall.

You plan on living a frugal lifestyle in retirement. Does your plan include increasing medical costs, which make up a larger percentage of spending in retirement and are growing much faster than inflation? Given the state of Medicare and Medicaid, there’s a good chance you’ll be covering more of those costs out-of-pocket than current retirees. In other words, you may need more income than you think.

You plan on gifting retirement accounts to charity. That may be true but what about passing on your savings to your heirs? Since Roth IRAs don’t have required minimum distributions, you can pass more on tax-free.

You are overwhelmed with investment choices. You can choose “one stop shop” asset allocation funds like target retirement date funds in your Roth IRA too. In fact, you may be able to pick one with lower fees or a better mix of assets for you than the ones offered in your employer’s plan.

Still not sure if a Roth IRA makes more sense for you? You can use this calculator to compare the results of Roth v. pre-tax contributions. (It’s designed for 401(k) contributions but works just as well with IRAs.) Of course, you can always split your money both ways too. Just remember that whether you decide to contribute to a Roth IRA or put more in your 401(k), saving in either place is much better than not saving at all.