Everyone says I need a Roth IRA. Do I really?

If there is one thing that personal finance gurus all seem to agree on, it is this: You should have a Roth IRA account. Alongside budgeting and having an emergency cash reserve, it has assumed its place as bread-and-butter advice. And why shouldn’t it?  What… Everyone says I need a Roth IRA. Do I really? as published on Women Who Money If there is one thing that personal finance gurus all seem to agree on, it is this: You should have a Roth IRA account. Alongside budgeting and having an emergency cash reserve, it has assumed its place as bread-and-butter advice. And why shouldn’t it?  What could be more attractive than being able to salt away thousands of dollars each year, have that money grow over decades free of tax, and then withdraw both what you contributed and what you earned in dividends with no tax liability at all? What could possibly be more delicious? But, of course, one size never truly fits all. The near-universal recommendation to open a Roth IRA account ASAP is no exception to that rule. First things first… Do you have a cash reserve? According to a 2021 survey, 25% of American households reported having no emergency savings at all.  As much as you may want to jump straight to investing, which I freely admit is far sexier than a savings account, a Roth IRA (or any investment account) is not the place for your emergency fund.  Firstly, there is usually a steep penalty (10%) for withdrawing earnings from a Roth IRA before you are 59 ½ years old. (For more details, see this page on the IRS website: Topic No. 557 Additional Tax on Early Distributions From Traditional and Roth IRAs.) But more broadly, the whole point of investing (instead of saving) is to assume risk to earn a higher return. In the long run, this can work out just fine. In the short run, however, losses will inevitably occur. You do not want to be in a position of having to sell shares in your account, locking in losses, just to pay for a new set of tires. Do you have access to a 401(k)? If you have crossed building a cash reserve off your to-do list, and are ready to invest for the long term, next consider your workplace retirement plan if you have one. Particularly whether you’re contributing up to the maximum allowable annual limit ($22,500 in 2023 and an additional $7,500 for those aged 50 or older). There is truly only one killer app for retirement saving, and that is the paycheck deduction.  It is the fundamental difference between saving for retirement through your workplace plan (your 401(k), 403(b), or similar) and using an IRA. The paycheck deduction is superior because you never experience, even momentarily, having the money available to spend. Instead, you internalize the deduction in your thinking (and budgeting), just as you do taxes withheld. Better still, some companies allow you to set up an automatic annual increase in the amount of your paycheck that’s invested, gently nudging your savings rate up over time. Even putting in place an automatic transfer from your checking account to an IRA is the second-best option. It’s simply too easy to turn it off when things feel “pinchy.” You will almost surely find multiple reasons to not increase your contribution regularly as other priorities crowd in.  Diverting a portion of your overall retirement investing to a vehicle outside of your workplace account could, if you are not diligent, result in a lower level of savings. And don’t forget, the contribution limit for a Roth IRA is far lower than that of a 401(k). In 2023, the maximum annual contribution is $6,500, or $7,500, if you are at least 50 years old. Should you have a Roth IRA plus a 401(k)? With all that said, reasons do exist that may lead you to choose a Roth IRA even if you are not fully utilizing your 401(k), contributing to the maximum annual limit. (Of course, you should always contribute at least what is necessary for an employer match if offered.) 1. Tax diversification.  In the olden days, workplace retirement plans came in only one