Why I fund a Roth IRA, not a traditional IRA
The other day, a friend asked me if I have any plans for investing any of the money we earn here. I told him about a few of them, one being a Roth IRA account I opened fairly recently. He asked me why I chose a Roth IRA instead of a traditional IRA, which isn’t normally the most fascinating conversation in the world, but it reminded me that I should talk about this more often anyway.
So, for those who might be interested, here’s why I made this decision:
- They told me to go the Roth route. Before I go any further, I should highlight how important this is. Instead of actually researching too much, I just went for it. Yes, I did some of the legwork. I’m not the type to not know what’s going on if I can help it. But the initial push to fund a Roth IRA came from just a few people I respected saying that this would be the best option for me. (From there, it’s more just a matter of why they suggested the Roth…)
- I don’t want to pay taxes later. This is the biggest difference between the Roth and the traditional setup. With the Roth, I use post-tax money to fund it, but then don’t have to pay taxes on the earnings in the future. With a traditional IRA, I’d get to fund it with money I don’t pay taxes on, but then I’d have to pay taxes when I take the earnings out later. I don’t pay any income tax because my salary for the past couple years has been from abroad. This I’m getting around taxes altogether with the Roth IRA.
- My employer isn’t matching my contributions. That’s a downside to working abroad, I guess. The way I understand it, though, the employer match usually only works with traditional IRAs. So the upside for me is that without the match, I don’t even have to weigh that in the decision.
I don’t plan on adding to it forever. In fact, I’m pretty sure I’ll stop within the next few years (and I’ll probably talk about why later on). For now, though, I think it’s good to do and good to talk about. Maybe there will be a tipping point soon.