Dear Liz: I’m interested in opening a Roth IRA for retirement purposes. My tax preparer tells me because I have an employer-sponsored retirement plan I can’t open a Roth IRA. Is that true? If I can contribute to a Roth, should I do so or pay down debt first?
Answer: You either misunderstood your tax preparer, or you need to find a new one.
Anyone who has earned income and whose adjusted gross income is below certain limits ($110,000 for singles, $160,000 for couples) may contribute to a Roth. The fact that you’re also covered by a plan at work is irrelevant.
You don’t need to pay down all your debt before you contribute to a Roth, and in fact you should be wary about passing up the chance to fund this terrific tax shelter. Withdrawals from Roths are tax free in retirement, and you’re not required to take out the money if you don’t need it, which means you can pass the account (and its tax advantages) on to your heirs.
You especially don’t want to forgo the opportunity to fund a Roth if the debt in question carries low rates, like most mortgages, auto loans and student loans. You’re likely to earn higher returns with a diversified portfolio of investments in a Roth than you’d save paying off relatively cheap debt.
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