Having a Roth IRA can give your retirement fund teeth. (Photo Credit: ThinkStock)

Retirement planning is a frustrating yet necessary process, especially with the precarious position of Social Security. Here are the top five reasons a Roth IRA retirement account is for you, courtesy of Smart Money.

Make tax-free withdrawals upon retirement with a Roth IRA

A Roth IRA enables you to put your contributions in after taxes. Thus, it is unnecessary for you to pay taxes on that money once it is withdrawn upon your retirement. More money is always helpful. Payday loans are fine in a pinch, but they don’t constitute a retirement plan.

Social Security won’t enable you to maintain your standard of living

You’ve heard the debates over whether Social Security will actually continue to exist forever. But let’s assume that it sticks around, and you believe it will cover you post-retirement. The government hasn’t let you down before, right?

Wrong. It’s all too common to read something like this on a Social Security statement: “You can retire on the princely sum of $2,000 per month. You may already be a $24,000 winner!”

Roth IRA beats 401k mutual funds

A 401k retirement account gives a retiree the option of choosing from one of two different types of mutual funds. That is very limiting. With a Roth IRA, you have a greater ability to manage your retirement funds.

Flexibility is always nice

Smart Money points out that Roth IRAs give the retiree a great amount of flexibility when it comes to managing their funds. Contributions can be withdrawn without establishing a compelling cause. Furthermore, a Roth IRA can be used to save for a child’s education. There are other benefits to being flexible, too. Check with your financial adviser.

Diversity in numbers

Putting all your eggs in one basket is never a good idea, and this old saying holds true with your next egg. Some people look to both a Roth IRA and a traditional IRA or 401k in order to more readily absorb the bumps and bruises of fluctuating tax rates. It’s a sound strategy that anyone concerned about retirement should discuss with a financial adviser. Be prepared and minimize your need for short term loans.

Sources:

Smart Money

Roth IRA basics

Wikipedia entry on mutual funds

When former news anchors hawk IRAs

The changing economy and investments

The result of failing credit is people want to put away cash. A recent Gallop poll showed that over 60% of Americans are more focused on saving than spending. That means that people are listening to the news about retirement funds and taking matters into their own hands. Social Security is expected to be gone in upcoming years and people will have to be prepared with their own cash reserves to manage through retirement. Though it is difficult, there are reasonable ways to save, but consumers are cautioned to be aware of things that could eat away at their hard-earned savings. Here are some things to watch for as the economy still shifts to regulate itself.

Federal income taxes

Everyone who has retirement accounts needs to know how funds will be taxed once they tap into the money. Changing rules can quickly diminish savings and leave consumers with considerably less money than they had anticipated. For any consumer who has 401k, SEP plans or IRAs, they need to be aware of the tax ramifications. Experts caution that consumers should consider putting money into tax-free vehicles like Roth IRAs and Roth 401k accounts. Tax-exempt bonds or capital assets like stocks, mutual funds and real estate are also good options that hold up well to any changes in the federal tax rate.

Changing interest rates

Another issue consumers need to be aware of is a change in interest rate. For example, if consumers look at the average CD interest rate, it is considerably lower than it was a few years ago. The interest rate on a year-long CD barely reaches 1%, while in 2002 the rate was at 6%. Consumers need to be aware of how anticipated funds can be much lower if the interest rate continues to fluctuate. CD laddering is one way to mitigate losses due to interest rates. This method will generate higher income from long-term interest rates and reduce losses of short-term changes in the market.

Pensions are reduced

Payday cash is not the only inflow of funds consumers need to be aware of throughout their lifetimes. There is also the pension to worry about. For example, a few years ago United Airlines filed for Chapter 11 bankruptcy. Though workers’ overall pensions were insured, that didn’t mean that some had to take considerable hits to the amount. One pilot who worked for United Airlines took a $7,200 a year cut in his pension without notice as a result of the company’s restructure. Retired consumers need to be aware of how their former employer’s changes can affect their payout. It’s a hard lesson to learn, but the key is to be prepared for it with additional cash reserves if it does happen.

The future of investing

Consumers are being warned by experts to change their way of viewing retirement funds. Although a worker can pay into funds for the duration of their working years, that no longer means the money will remain stable. Market fluctuations, changes in interest rate and changes in taxation all can affect funds. The best thing for consumers to do is to be aware of the potential changes and either move money to different savings vehicles or compensate in other ways for the losses. Payday cash should be a high priority for consumers today, but so should their retirement plan. Experts are warning people to be vigilant about what could happen in the future. The recession taught people a hard lesson on how investments’ values can change quickly in a volatile market.

Many consumers are worried about debt relief as they reach retirement age.  With news of Social Security and Medicare being tapped out within the next few decades, Americans are looking for other options to retire in comfort.  Fortunately, there are some jobs that still focus on pension plan guarantees.  Here are some industries that still support their retirees.

• Public-Service Sector workers.  Local, state and federal government positions are still highly attuned to retirement benefit payouts.  According to the Bureau of Labor Statistics, almost 80 percent of state and local government workers had traditional pensions last year. Olivia Mitchell, director of the Pension Research Council, stated “Police officers, firefighters, teachers and judges have always had pension plans.” She also noted that these careers are all putting more money into firming up their workers’ retirements to provide security for them.
• Large, private companies. Although pension plans are more difficult to find in the private sector, a recent study showed that 21 percent of private-sector entities had a plan for retirees. This is a huge benefit for employees who know they will have a guaranteed payout for their retirement years.  Consumers need to look for employment, but be aware of the retirement funding statistics. A recent poll showed that only 9 percent of companies with less than 100 employees and 34 percent of companies with more than 100 employees offer traditional pensions. Management and professional positions are also the most likely to offer  retirement plans, regardless of the size of the company.  Service-sector jobs are the least likely to have any retirement benefits.   Geographically, mid-Atlantic, Northeast and Pacific coastal regions are the most likely to have jobs with retirement benefits, in particular in their large metropolitan areas.
• Businesses with less than 10 employees.  Although most small businesses don’t offer retirement funding, exceptionally small offices normally do. This means offices with less than 10 employees, commonly doctors’ offices, law offices or family-owned businesses.  Author and expert on retirement Fran Hawthorne stated, “Very often, the owners of small doctor’s offices set up the pension plan because they want a tax-free way to put money aside for retirement. … The law requires that if you do this, you must provide the same pension for all your employees based on income.” This is encouraging news for Americans who want to work in the small business sector but still have a plan for retirement and debt relief in their elder years.

The key to success

Employees who are working for smaller businesses need to know that retirement funds are most beneficial when they stay with a company for an extended period of time.  Payouts are maximized based on time spent servicing a company.  It’s also beneficial to know that the sooner employees get retirement plans in place, the better they may fare at payout time.  Hawthorne added, “If you don’t get a job with a pension now, your (payout goes)  down every year because more and more pensions freeze each year.”

Planning for retirement

Planning for retirement is a number one concern of Americans today.  With unemployment running high, debt relief being sought and foreclosures increasing, people are wanting to store away money for the future.  There are still some ways to wisely handle the situation and live comfortably in the golden years.