The Roth IRA: A tax shelter for your golden years.

Posted by Matt

I hope I wasn't the only person who took advantage of the free financial advice opportunity I mentioned last week. I spoke for about ten minutes with a financial adviser who essentially told me that my wife and I should have a higher proportion of our portfolio in retirement accounts.

Towards this end, I'm finally going to open a Roth IRA. I haven't thought about these in years, but I remember that when I first heard of them, they sounded like a really good idea. Everything I read this weekend seems to back that up.

So, what's my excuse for not having one already?

One, I consider myself a minimalist (meaning I'm mentally lazy and don't like to keep track of a lot of things) and didn't want to open a separate retirement account when I already had a 401k.

Two, I'm not maximally funding my 401k yet and thought I should do that before moving on to a Roth.

I explained this to the adviser, but he convinced me by adding a new consideration: If I put ALL my retirement money into a tax-deferred account (like the 401k), I risk pushing myself into a higher tax bracket when I withdraw that money in retirement. The Roth is funded with after-tax dollars, so you avoid taxes on withdrawals.

I like the theory around using the 401k to reduce my taxes while I'm working and the Roth to reduce them in retirement, but I could still imagine that a scenario might exist where I could retroactively crunch numbers and determine that it wouldn't have mattered which investment vehicle I chose.

So, given my laziness, why am I still going for a Roth?

Because another one of the great features of these accounts is that you can withdraw the full amount of your contributions without penalty (though early withdrawal of earnings is penalized) at any time. While I certainly don't advocate dipping into retirement accounts, I like the idea that the money is not as tightly locked away in a Roth as it is in a 401k (via penalties.) That might let me retire a few years early (if I'm lucky) or serve as a substantial backup to my emergency fund.

So yes, I'm finally going to open a Roth, but still have to figure out some details about the funding process as my wife and I also hope to make accelerated mortgage payments on our new house (we close escrow in two weeks). We're going to meet with a certified financial planner in the next few months for validation of our ideas.

I'll let everyone know the final plan as soon as I do!