Roth IRAs have become very popular, especially since the limits have been raised to $5000/yr ($6000 if you are over 50) and are limited to those earning less than IRS limits (for 2010 Roth availability is phased for joint filers $167,000 to $177,000).  Certainly, pulling out gains tax-free later in life is attractive.  Roth IRAs have a number of disadvantages.  The money cannot be used or considered for emergencies.  In order to receive the money tax-free you must wait until you are 59 1/2 and at least five years, otherwise you will face a tax penalty (there are a few exceptions).  For older people nearing or in retirement, Roth conversions may seem attractive.  In this case, you pay taxes on your IRA and roll the money into the Roth (or what’s left of it).   From that point on you will never pay taxes on the gains, provided you wait until 59 1/2.  In all the analyses I have done, I have yet to see a conversion make sense.  However, if taxes rise substantially you may very well be glad you have a Roth.

Can the IRS tax Roths in the future?  YES!  Congress has changed the rules on retirement accounts long after the participants made the decision to invest in them.  There is already talk that a money-hungry Congress is looking for ways to tax Roths for high earners.  There are other problems with Roths.  The money still must be exposed to risk, or sit in a bank and lose value.  A Roth cannot be used as collateral either.  We have a better solution we call the “Unlimited Roth”.  This program is NOT limited to $5000/yr, is NOT exposed to market risk, CAN be used as collateral, and IS available for emergencies.  This solution is called permanent life insurance.  For more information see our page on “tax-free retirement.”

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