Making a living in the volatile world of financial markets, has  taught me to appreciate the simple things in life, like the benefits of having a  Roth IRA.  Before I explain all the meaningful benefits of a Roth IRA, I want to put the Roth IRA in perspective.

Whenever you are saving for a particular goal, you need to consider your strategy (time frame), the savings vehicle (tax structure) and ultimately the investments that go into the savings vehicle.  The Roth IRA is simply a savings vehicle that offers many great benefits as long as you follow the rules.

A Roth IRA should not be associated with high volatility and high risk investments only.  I am pointing this out because many people have stopped contributing to IRAs, Roth IRAs and 401ks because they associate the recent stock market volatility with their 401k and IRA or Roth IRA.   This is a mistake.   Remember that the Roth IRA is a savings vehicle (a tool) that can hold everything from gold coins, cash, stocks, mutual funds, currencies and more.  It can hold almost anything your bank can and usually a lot more.  The difference is the tax benefits and liquidity versus it’s peers.    How did investors start to associate their 401ks and IRAs with high risk investments?   The simple answer could be that 401ks and IRAs are considered for long term investments.  But it goes beyond that.

After 9/11 and the recent financial meltdown many investors have naturally been  associating savings vehicles like 401k and Roth IRAs with losing money.  You really can’t blame them if you look at the past 10 years .  As we run through the benefits of owning a Roth IRA remember the benefits are realized whether you invest in cash, gold, stocks, T-Bills, etc.  Developing a sound investment strategy or thesis is something completely different.   Just be sure to follow the rules.

The Tax Advantages – Hands Off Pay Now and Play Later

My mother is an aggressive saver.  She managed to amass a healthy nest egg through her 403 (b) while she was a school teacher for 35 years.  Recently, she had to consider the implications of “tax-deferral” versus after tax savings money, as she will have to take  “Required Minimum Distribution” (RMD) when she turns 70 1/2 next year.  My favorite feature of the Roth IRA is that any money that is placed in a Roth is free of capital gains and income taxes when you retire.  This means that when you retire, the government keeps their hands off your money.

The Roth Rules

As with any government tax break, there are certain rules to follow.   First, the Roth IRA can only be funded with earned income from a job. You can’t just move other money into your Roth.

There are also Roth IRA income limitations or caps to be aware of.  For 2010, you can contribute the full $5,000 as long as your income is below $105,000 (single) and $166,000 (married filing a joint return)   This is why the Roth IRA is a great tool for younger investors who are just getting started investing.

Additional Benefits of the Roth IRA

While the goal of the Roth is long term savings, you can take contributions out anytime, tax free, without penalty and you don’t have to put the money back (as you would with a 401(k) loan).  Although the best strategy is to keep your money growing tax free in your Roth and have a separate emergency fund, it is good to know the Roth is there if you get into a pinch financially.  The Roth’s ability to create tax free liquidity is also a major reason I prefer the Roth to a traditional IRA.

Roth IRA For First Home Buyer

The IRS will allow you to withdraw up to $10,000 (including earnings; not just contributions) towards the purchase of your first home.   This is as long as your Roth has been opened for 5 years minimum.  You can take it out prior to 5 years, although you will have to pay taxes, just not the 10% penalty that comes with a traditional IRA early withdrawal.

Roth IRA for Children’s Education

With a Roth IRA you can access contributions to pay for your child’s tuition and education costs.  While there are other savings vehicles for your child’s education, it is good to know that you can give your kid an assist if needed from your Roth.

In Conclusion, I think the Roth IRA is simply one of the best savings vehicles available to investors today.  The tax benefits, high liquidity and flexibility make a Roth IRA a “must have” in my opinion.

I hope you found this article helpful in pointing out the benefits of owning a Roth IRA.

Related posts:

1. Roth IRA 2010, Basics
2. Benefit of the Roth IRA, Tax Savings Benfits
3. Converting A Traditional IRA to a Roth IRA in 2010
4. 2010 Roth IRA Contribution Limits
5. Recession Creates Confusion As To How To Save For Retirement