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No, I Don’t Think You Should Open a Roth IRA

I do, in fact, have a love affair with the Roth IRA. (If you’re unfamiliar with it, J.D. has an excellent explanation of the Roth.) But, it is an unrequited love – the Roth does not love me back. Someday, it will. Someday, I will open my own Roth IRA and my money (and love) will grow inside it. But not yet.

A friend of mine asked me what a Roth IRA is, and whether I should get one. I sent him J.D.’s link, but I also said I didn’t think he should get one. Yet. For the same reason that I don’t have one. Yet.

We’re both carrying around some nasty, high interest credit card debt. Sure, we could start putting money into Roths, and if the Investment Gods shined down upon us, we could earn around 10% on our money each year, and the power of compounding would give us a tasty retirement. But if we’re still carrying around our credit card debt (at 17% or higher!), then we’d just be back-pedaling. We’d be paying more to the credit card companies than we’d earn.

This is where the difference between investing in a 401(k) and an IRA can really be seen. If your employer offers matching funds in your 401(k), then it makes sense to contribute, even if you’re carrying around credit card debt. But there’s probably no one matching your IRA contributions (unless you have a generous relative – in which case, go for it).

So, my friend and I, we’ve got some credit card debt to tackle. Once we’re clear of that… well, I know I’ll be beginning my sordid affair with the Roth!

7 responses to “No, I Don’t Think You Should Open a Roth IRA”

  1. J.D.

    First of all, using Safari on a Mac, your name, mail, and website boxes have white text on a white background. That’s right — the text I’m typing them is invisible! :)

    Secondly, great point. Debt reduction first! I should have mentioned that in my post.

  2. The Travelin' Man

    There is one reason why you might consider opening a Roth now, as opposed to later. You can use the money in your Roth to pay for your education (or first-time home purchase, for that matter). As a matter of fact, you can take out the money that you CONTRIBUTED any time (not the earnings) tax and penalty-free.

    The key, though, for you, is that the money can be used to fund your education. So, you can get the tax privileges of the Roth on the growth and earnings, but the benefit of being able to use the money now.

    You might check this article for a more thorough overview:
    http://www.kiplinger.com/columns/starting/archive/2006/st0309.htm

  3. Q at $1 Million to My Name

    Can you get the credit card debt onto some 0% balance transfer credit cards? Then you could chip away at the debt and also invest a bit in a Roth.

  4. goldi

    Every situation is different.
    For an excellent personal guide go to http://www.itsyourira.com.

  5. Janni

    One big advantage of a Roth IRA is that qualified distributions are tax free. But, there are a number of other Roth IRA advantages, particularly with a self-directed account. If you are trying to choose between a traditional and a Roth IRA, here are some things to consider.

  6. save and go green

    Roth IRAs are the way to go. The only problem with them is that they have an income limit. Many could argue that at that point, it would be better to invest in a traditional IRA. I still think it would be better because who knows how high our taxes are going to be in the future with the high government debt we have.