Open a Roth IRA now

There are a few pieces of financial advice that work lock-and-barrel for nearly everyone. Many personal situations are unique, requiring tailored solutions devised for that specific scenario. I want to give you a financial recommendation that works for just about anyone.

Here it is: open a Roth IRA now.

If you don’t have a Roth IRA already, you should. I want to explain why that advice makes sense. And to do so, you need to understand a few of the intricacies of Roth IRAs. Don’t worry – we’ll keep it light but informative.

A Roth IRA is a special type of retirement savings account that Congress created in the late 1990s. The most endearing quality of a Roth IRA is that it allows for tax-free growth of your savings. If you play your cards right, you should be able to take money out of the account in retirement completely free of tax, including your contributions plus all growth.

That’s a big deal.

If Congress increases income tax rates in the future, Roth IRA holders couldn’t care less. They have no future tax obligation tied to their retirement dollars, thanks to the Roth IRA’s special structure.

Plus, with a Roth IRA, the account owner can always remove any contributions they have deposited into the account at any time, free of taxes and penalties. So if you contribute $15,000 into a Roth IRA over a number of years, you can withdraw that amount at any time, no tax and no penalty. The growth on your contributions is a different story – as you will see, you need to be careful distributing anything other than your contributions. But still, anytime access to your contributions is a nice perk.

And while tax-free growth and full access to contributions are great, those are not the reasons to open a Roth IRA now. There’s a more technical reason to do so.

Roth IRAs are subject to what is known as the “five-year rule.” This rule is the reason everyone should open a Roth IRA now.

The five-year rule determines if the growth on your Roth IRA can be withdrawn tax-free. There are two requirements: 1) The account owner must be at least 59-1/2 or meet another exemption reason, which we won’t go into for now, and 2) The account must have been open and funded – even with just $1 – for at least five years.

Let’s look at an example to understand why opening a Roth IRA as soon as possible is so important.

Meet James and Janice. Both are 63 years old and will retire in two years. Before they retire, they intend to annually fund a Roth IRA to supplement their other retirement savings. Over the next two years, they each contribute $15,000 into their Roth accounts and they select the exact same investment.

James didn’t have a Roth IRA previously, but Janice had a Roth IRA that she opened in her early 50s. She only contributed $1 to the account though, so it wasn’t worth much.

It just so happens it was a good time to invest. The gain on their $15,000 is $3,300 over the next two years.

Now, at age 65, both James and Janice need to unexpectedly withdraw their full Roth account. They are both older than 59-1/2, but James has only had his Roth account open for two years. Janice, meanwhile, has had hers open for more than a decade. As a result, James will owe taxes on his $3,300 of growth, but Janice will get hers tax-free.

That’s why it’s important to start a Roth IRA as soon as possible. It gives you the maximum flexibility to take advantage of the rich features of Roth IRAs.

Satisfying the five-year rule doesn’t guarantee that your growth will be tax free if you withdraw it – you still need to be 59-1/2 or meet another exemption. But it at least checks one more box.

Don’t wait. Start your Roth IRA today.

Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at

This column is paid for by Invisor.

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