As one of Dave Ramsey’s Endorsed Local Providers for much of Wayne, Medina, Stark and Summit counties we typically meet clients who have heard Dave talk about putting money into a Roth IRA but may not completely understand the “why” behind that recommendation. To be clear, Dave never recommends you do any sort of investing until you complete the first 3 Baby Steps, which are (1) to build a $1,000 starter emergency fund, (2) Pay off all non-mortgage debt using the “debt snowball” and finally (3) save three to six months of expenses (note expenses, not income) in savings.

First things first, so what is a Roth IRA? A Roth IRA is a personal retirement savings plan that offers certain tax benefits to encourage retirement savings. What are those tax benefits? Unlike a Traditional IRA where you are putting in pre-tax dollars a Roth IRA has the individual contribute after tax dollars. Like a Traditional IRA the investments inside of Roth IRA grow tax deferred, but unlike a Traditional IRA, if certain conditions are met, distributions (including both contributions and investment earnings) will be completely tax free at the Federal level.

That’s where the fun comes in – let’s assume, our friend, Johnny Client, who is 30 years old has worked the Baby Steps and is now on Baby Steps 4, 5 and 6, thus he is saving 15% of his household income into retirement. Johnny’s income is $50,000 and through his company provided 401(K) Plan he’s eligible to receive a 5% match on all contributions. Thus Johnny contributes the 5% (which is $2,500 per year plus another $2,500 in company match) and to round out his Baby Step 4 he’ll be investing 10% (to get to our total of 15% of household income) or $5,000 in his Roth IRA. Johnny decides he’ll be retiring at age 60 and over his 30 year career he would have contributed $150,000 to his Roth IRA, however based on an 8% rate of return, the account value is $566,416.06. That means Johnny has earned $416,416.06 that he has never and will never pay any federal taxes on.

There are certain rules that you must meet to be eligible to contribute to a Roth IRA, including

You must have received taxable compensation during the year (or your spouse if married filing jointly)
You must be under certain income limitations (if your modified AGI is $131,000 or greater as a single tax filer or $193,000 as a married filing jointly filer you’ll be unable to contribute)
You must not have already contributed the annual maximum to your Traditional IRA.

Other strengths not discussed include:

1. Fewer restrictions on making withdrawals prior to retirement.
2. You can contribute to a Roth IRA after age 70 ½ (not possible with a Traditional IRA)
3. Your funds can stay in a Roth IRA longer than a Traditional IRA (no required minimum distributions)
4. You can contribute even if covered by an employer-sponsored retirement plan (401K)
5. Investment choices are broad and diverse
6. When you die, your beneficiaries may pay no income tax on proceeds
7. Contributions are discretionary (up to IRS annual dollar limits)
8. “Catch-up” contributions are allowed if you’re at least 50
9. You may qualify for a tax credit (certain low and middle income taxpayers can claim a partial, nonrefundable income tax credit for amount contributed to a Roth IRA.)


Raymond James Financial Services does not endorse and is not associated with the Dave Ramsey Endorsed Local ProviderProgram. This is a hypothetical illustration and is not intended to reflect the actual performance of any particularsecurity. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Theinformation has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material isaccurate or complete. Any information is not a complete summary or statement of all available data necessary for making aninvestment decision and does not constitute a recommendation. Any opinions are those of [FA NAME] and not necessarilythose of RJFS or Raymond James. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held theIRA for five years before tax-free withdrawals are permitted.