Like so many savings plans, Roths work best when you start them young. Happily, "young," by my age scale, includes working people in their early 50s. Older working people should consider them, too.
Both Roths and traditional IRAs are basically savings accounts with good tax breaks, which makes them an excellent place to stash cash for your retirement. You can sock away up to $5,500 in an IRA this year — $6,500 if you're 50 or older.
You can make the full annual contribution up to a certain income level. For traditional IRAs, that's currently $59,000 for singles and $95,000 for marrieds. For Roths, it's better — $112,000 for singles and $178,000 for marrieds. After that, the allowed contributions gradually decrease to zero.
Here's what Roths offer compared with traditional IRAs:
1. Easy access to your money, at any age.
You're allowed to withdraw your personal contributions whenever you want, without paying taxes or penalties. If you put $1,000 into a Roth on Monday and suddenly need some cash on Tuesday, you can take that $1,000 right out again. So your Roth can be both a retirement account and a ready savings account. Traditional IRAs don't allow free withdrawals.
2. Retirement income, tax-free.
There's no tax deduction for the money you put into a Roth. Instead, the money you earn on your investments comes tax-free when you retire. To get this tax break, you generally have to hold the Roth for at least five years and be older than 59-1/2. If you're in a high tax bracket and expect to drop to a lower one when you retire, you might prefer the traditional IRA. In a traditional plan, your contribution is deductible on your current tax return. On the other hand, you might be in a high bracket when you retire, especially after age 70-1/2 — the age when people who hold traditional IRAs begin mandatory withdrawals. Future tax rates are a guessing game. They're one factor, but not the only one, that enters into the Roth decision.
3. Tax-free wealth for your heirs.
Roth accounts are terrific for people who expect to leave at least some of their IRA savings to their heirs. People who inherit traditional IRAs owe income taxes on the money. Roth IRAs come income tax-free and could grow, tax-free, for two or three generations.