Roth IRA really better?

[Guest abunai]

I would like to know how differing interest rates affect the advantage of a Roth IRA. For example, if I have a Roth IRA that earns 1.89% APR and a savings account that earns 3.5% APR am I still going to save more in the Roth IRA? Doesn't it depend on how long I keep money in there? When do the tax savings "outdo" the interest savings?

Also, can I really take money out of a Roth IRA with no penalty?

Thanks for your help!

[John G]

Abunai,

You can't get a simple answer to your question. Why? Well partly because you seem to be making a false comparison. I don't understand why in your example your Roth could not have the exactly same investment option as your taxable account. You have a very wide range of investment options with a Roth.

Even if you made an apples to apples scenario, it would be impossible to accurately respond. Why? Because you need to know the number of years you will invest, tax rate now, tax rate in the future, and a host of other info. You might want to develop a spreadsheet to run some scenarios or investigate the Roth calculators on the web at various brokerages and mutual funds. They vary in sophistication.

I have a second question for you. Why would you have long term investments tied up in very low yield CDs or money market accounts. If you have a long time horizon, you should be investing in equities.

You can take contributions (not earnings or appreciation) out of a Roth early without penalty... but why would you want to erode your tax shelter? Just because the IRS/Congress allows an option does not mean it would be sensible for you. There are also some penalty free withdrawal options for buying a home or paying for education. Again, this may not be the best idea and you may have other options after a few years.