Meanwhile, Roth IRAs offer a somewhat different approach, because the money you’re putting into the account is after-tax rather than pretax. Thus, once you own the account for five years, there is no limit or penalty on the withdrawal of the contributions you’ve put into the plan (though withdrawing any investment earnings does trigger tax consequences), because you’ve already paid taxes on that money.
That makes Roth IRAs to some degree more flexible in terms of pulling money out before you’re ready to retire. In fact, some finance experts suggest using a Roth IRA as a place to stash longer-term emergency savings. That said, others argue that the best use of such accounts is what they were designed for: saving for retirement. As with all things retirement, it makes sense to discuss the ins and outs of various account types with a professional financial planner.
(Editor’s Note: This column previously appeared on Investopedia.com.)
— By Eric C. Jansen, founder, president and chief investment officer of AspenCross Wealth Management