Three weeks ago I got an email from Jeff Rose at Good Financial Cents. He was speaking to around 50 seniors at his college alma mater about personal finance, and when he polled the crowd to see if they had heard of Roth IRAs, not a single person raised his/her hand. Rose had done talks like this in the past, but always a few people raised their hands.
This shocked Rose. If it were me, I would have chalked it up to a few factors…
- I’ve found that people generally don’t like to call attention to themselves in a crowded audience.
- I could see a scenario where a few people had heard of Roth IRAs, but didn’t raise their hands because they feared they would be called on to put their knowledge to a test.
- I thought back to when I was in college. The people with jobs had them because they needed the money (let’s make “need” very flexible in this case to include funding beer and Ramen Noodle budgets). The people without jobs were mostly focused on their studies (or getting the most out of their beer budget). In short, given the audience, most of whom either have no income to be Roth IRA eligible or no money to contribute to one. It is natural for people to dismiss something that wouldn’t be applicable to them.
- These people are likely close to 50 years away from retirement. (Can I presume that retirement age for a 22 year old, given the state of Social Security, might be close to 72?) I can forgive for them not thinking that far ahead.
However, it wasn’t me giving the talk and Jeff rose is anything but Lazy. He decided to do something about it. With that he created a movement to spread the word about Roth IRAs. With that movement he has convinced a bazillion personal finance bloggers (though realistically closer to 150) to write about Roth IRAs today.
I’m always one to join a movement and I agreed. I just have a couple of little problems, that I didn’t think through. I tend to think my audience knows about Roth IRAs because I mention them from time to time. Raising awareness about Roth IRAs on a personal finance blog is like explaining how tagging up works in baseball to someone who has held season tickets for a dozen years. It’s preaching to the choir. What we really need is someone like Wes Welker who can reach an entire audience of people not familiar with Roth IRAs.
The other problem that I have is that Roth IRAs are boring. I’m one of the world’s biggest math dork/nerds and I find them boring. With that out of the way, let’s make this pretty quick and move on to more interesting topics. Roth IRAs are a great place to save for your retirement because investment gains are not taxed. It isn’t often that Uncle Sam gives us a way to make money without pay him his fair share. Take advantage of it.
Oh and those 401k things… in general they are pretty cool too.
Frugal Joe says
A Roth will not do much for a senior citizen unless they still have earned income. Social Security and an pension are not earned income so the interest you earn will be taxable. So not really any point, might as well just put your money in a saving account neither one pays enough interst to make a dif anyways.
Agree that Roth IRAs are the 2nd best investment (free money on a 401k match is better). I think the greatest retirement invention in the last twenty years is the Roth 401k. Higher contribution limits, no AGI restrictions and the match goes in the traditional side so you get best of both worlds.
All that being said, I disagree with your last line. 401ks, other than contributing to match, is the opposite of cool. It gives people tremendously poor senses of security. They look at their statement and say “yeah, I have a million bucks”, when in reality they have about $650k.
I design 401ks for a living and I can tell you they usually have higher fund expenses (that’s how brokers get paid) and less fund options than investing yourself.
Lazy Man says
I know what you mean about giving people a false sense of security. However, at least the people with a million dollars in the account will have that 650k after taxes (and if they take it over time, they likely won’t be charge at the 35% rate, so it could be considered more than that). Contributing to a 401k is a great way to automate the savings process. Let’s pretend that a person doesn’t do a 401k. People could look at their bank accounts and think, “I have all this money in here, I’m can afford a couple of extra fancy dinners a month.” There’s an important psychological factor of forced savings at work with the 401k.
With that said, more than five years ago, I wrote this article: 5 Reasons to Throw Away Your 401K. That addresses the limited fund options and higher fund expenses as well as a few other things.
What happens when Uncle Sam realizes a majority of taxpayers saved for retirement in Roth IRAs or 401Ks and they cannot tax those people’s income? We’ll have another problem like the currently underfunded Social Security/Medicare funds. I predict at some point in my life time (I am 25 and have been contributing to a Roth IRA since age 18) Uncle Same will change the tax code and start taxing Roth accounts.
Lazy Man says
They can and do take 401Ks.
If Uncle Sam tries to take Roth IRAs, invest in pitchforks. Americans have agreed to compromises with Roth IRAs to get the tax benefits. If Uncle Sam took away those benefits your pitchfork invest will pay off.
Social Security is easily fixed… it will just pay out less and less until it is sustainable.
Wes Welker, lol!
I’d suggest having at least some of your money in “traditional” IRAs or 401(k)s. If you have $0 in income after retirement, that means that you’re losing the chance to pay taxes at the lowest marginal rate. If you have to pay taxes, it’s best to pay them at the lowest marginal rate.