Yesterday, I wrote about the most common fear of a Roth IRA, that I have talked to my friends about. And that fear is putting the money into a Roth IRA, then needing the money, but not wanting to get penalized to do so. What many people fail to realize is that you can take your contributions (a fancy word for deposits) out at any time without being penalized.
Second Most Common Fear to Overcome
The 2nd most common fear that I hear is the complexity of opening a Roth IRA. This is understandable since if you have a 401(k), the creation of the account was performed by your Human Resources department. But really opening a Roth IRA, it’s as easy as opening a regular brokerage account… Any large financial company (and most of small one too), would love to have you create a Roth IRA with them! Brokerage, mutual fund, banks, practically any financial institution would love for you to open a Roth IRA account with them, so this should not be a fear, just go and try it. Most financial companies even have you print off the forms via the internet and mail them in or let you open an account online.
Unusual Benefits Of a Roth IRA
The following is how I view a Roth IRA, my view is personal and I don’t recommend this approach, since a Roth IRA is a retirement instrument. That said, it works for me!
1.) Emergency Fund – An emergency to me isn’t a sale at a local store that can’t be passed up or a new set of tires. And emergency to me is something horrible that may or may not happen in my lifetime. Since I consider an emergency something drastic, I have no qualms using the contributions to my Roth IRA as a stealth emergency fund. I hope that my other money sources can handle minor emergencies, but if I need it, I will use it. The earnings portion (what is left after I take out my contributions) within the account I will not withdrawal until other options have been tried first.
2.) Dividend Tax Shield – I use my Roth IRA as a dividend tax shield, by this I mean that I buy stocks that yield a dividend because the dividend won’t be taxed in the Roth IRA! Personally, I think this make a Roth IRA the perfect dividend tax shield or tax safe haven! Where else can you have dividends that aren’t taxed? Yes, this is a brilliant instrument for avoiding taxes on dividends! Since the tax rate on dividends currently is relatively low, I haven’t used my Roth IRA too much for a dividend tax shield, but in the future when the dividend tax rates rise, I will be definitely use my Roth IRA for that purpose!
I’m not going to talk about the other typical benefits (like college, house buying and inheritance benefits) in the article, those are fairly well-known though.
I will conclude my analysis of the unusual Roth IRA benefits by stating that the Roth IRA is a gift for the middle class that should not be ignored. Often times, when we have something great in our area we never use it. It’ funny because others think we are so fortunate to live so close to or have such a great treasure. What they don’t realize is that very often we don’t take advantage of such treasures. Please don’t let the opportunity to create and fund a Roth IRA slip by and become an unused treasure! It’s one of the best things that the government has created for the middle class (thanks Senator William Roth, rest in peace).
So if you qualify, are you taking advantage of one of the greatest government loopholes for the middle classes with respect to saving and growing money?
MR
The concept of tax free dividend income is a great idea. I love it.
Yes, what a wonderful perk. I’m surprised it’s not talked about more on the pf world…
I agree with CFM, I have a ROTH and didn’t think about it this way. Genius!
Thanks, I find that dividend tax shield is one of the best “not well thought about” perks of a Roth IRA. It really is a powerful instrument…
Started investing in a Roth Ira years ago, however it was for the tax fee income and the ability to pass it on to heirs.
Yep, that’s pretty commonly know (I hope). The inheritance mention in my article above is what you call the heirs part, skipping probate (priceless) 🙂
As much as I don’t like withdrawing from this retirement account, the emergency fund aspect is very useful. I have heard of some people using it as an effective college savings fund for children. It a tax effective way to maintain control of those assets.
It’s versatile, that’s for sure!
I have to admin I do like playing the capital gains and dividend advantages of a Roth Ira…
I went with a 529 plan for my kids, I maintain control over it and can even reassign it as I see fit. But a Roth Ira is a good college saving plan too, but I’d rather use it for myself (mauhaha)
Don’t have much to say other than these are some great articles you have written about Roth IRAs!
Thanks!
I’m trying to look at Roth IRAs from a different angle. I hope others find value in them. In some ways Roth IRAs is the Rembrandt at a garage sale that nobody realizes has value and is selling for $1.00 with now buyers. 🙂
Yes, last year you mentioned being able to withdraw all except for earning from your Roth, my mind instantly went to the Roth being an effective shelter. That’s because of the type of investor that I am (I know we share investing philosophies). I love that you wrote about it. My belief is that it is not written about as much because so many people who are younger do not concentrate on portfolio income but rather portfolio growth via appreciation.
It’s funny, but some of the stuff I wrote earlier I actually hated doing so because I knew not as many people would see it. My thoughts around the Roth IRA topic hasn’t really changed, but now that I have more visitors to my site, and so it’s worth repeating in more detail.
If I quadruple in size again, I will probably spin it another way to replay the message. I think some things need repeating for a larger audience, and if I can spin it in such a way that makes it enjoyable for those that have visited in the past, then all the better.
This is one of the few financial topics that needs to be heard, understood and acted upon…
Of course I love that the capital appreciation that occurs from successfully selling securities is a nice perk too. Lately, I’ve been very happy with my Roth IRA’s performance! Now if I just had more money in it…
Feel free to repeat yourself. Everything is repeated in some ways. I’m glad I don’t have to talk about new topics every week either! I completely understand your sentiments about saying stuff before your audience has girth. If I may, let me share my experience. In the period of one week, I got 50,000 visitors all from two posts. Before then, I had virtually no subscribers and traffic. Yet after that week, a couple hundred subscribed from just those two post; I didn’t even have a subscription button displayed to be honest, but they figured it out. The point is, you never know who’s going to see your content and when they are going to see it. Share, reshare, repurpose…it’s all good!!!
Great point! A lot of our posts are EPIC thought, so it’s not to surprising to me in your case 🙂
When I read your articles, it reminds me of when I was in college reading a truly interesting article on finance. Great stuff, glad you’re back!!!
Awe, thanks Don. I’m still trying to learn this blogging thing. If I was willing to press publish more, I would be in much better shape traffic-wise, but I wouldn’t be happy. My posts wouldn’t be the way I want them to be. I’m working to get back on the right track again. It’s definitely a process, so wish me luck, as we travel down this path together. I had a good week, so no complaints on my end 🙂 Cheers!
Unfortunately, I do not qualify for a ROTH. But if I did I would definitely take advantage of it. When I have children I will make sure they fund their ROTH when they are in lower tax brackets
I think that’s awesome that you don’t qualify! The Roth is great for the most of us, but if you make more than the limits… well that’s even better! 🙂
Yes, I’m definitely going to start one for my kids once they have some earned income, in the mean time, I have UGMA accounts for them…
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Gotta love that tax free dividend! That’s also one of my favorite benefits of a Roth IRA. Now I just need to buy more dividend paying stocks! lol
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