My Best Move

Don’t worry, I’m not talking about dance moves.  Anyone who’s been to a wedding I attended will tell you there’s no such thing.  What I am talking about is my best financial move, and that is easy to pick.

The best thing I’ve done financially is open a Roth IRA.  From a tax perspective, it’s the exact opposite of a 401k or regular IRA.  With those accounts you may get a tax deduction when you put money in, but then everything is taxable when you take money out.  With a Roth IRA, you get no deduction when you put money in, but then it all comes out tax-free.  Although certain conditions must be met first, namely that you’re at least 59.5 years old and have had the account open for at least five years.

Although that’s basically how a Roth works, it’s not the best feature to me.  Because you get no tax deduction when you contribute money, you can take out your contributions, tax-free.  There are different rules for earnings (see above), but the money I’ve contributed is available to me at any time, for any reason, free of any federal taxes or penalties.  I call it the Swiss Army Knife of financial planning because of this flexibility.

Saving for retirement in your 20s and 30s is great, because compound interest is an amazing thing.  But there’s a lot of life to go before reaching the magical age of 59.5 that means retirement in the eyes of the IRS.  Saving into my Roth IRA has given me great long-term tax benefits, but I’ve known that my money was accessible in the short-term for things like buying a house, starting a family, or a financial emergency.  It’s money that I hope to leave alone to grow for decades, but it’s another bucket of funds I can tap anytime if I need to.

One other catch is that you must have earned income, but not so much that you are over the IRS income limit.  This makes the Roth unavailable to many people who are retired or in the prime of their careers.  But if you have a young person in your life that you care about – whether it’s a child, a grandchild, or a friend – ask them to look into a Roth IRA.  It’s not for everyone, and what’s most appropriate will always depend on your unique circumstances.  But the flexibility of a Roth IRA can make it especially attractive to a younger person with so much potential – and uncertainty – ahead of them.