Archive for the ‘Roth IRA Basics’ Category:
What Is A Roth IRA?
For a lot of people that are planning their retirement, they open a Roth IRA account.
The Roth IRA was created in 1997 when Congress passed the Taxpayers Relief Act. The Taxpayers Relief Act was designed to encourage working Americans to save money for retirement.
There is no age limit on contributions, so anybody can open one of these accounts. Roth IRA’S can be opened through an independent brokerage service, or through your bank.
With a Roth IRA, the earnings on any investment grow tax free. Your distributions on the account go untaxed as well. What does this mean? When you withdraw your money at retirement age, the money is not taxed by the IRS on this income. A Roth IRA lets you withdraw any contributions you make, at any time with no penalties and they are tax free. This does not apply to withdrawing earnings.
Most Americans qualify for a Roth IRA. It depends on your tax filing status and your income. Currently single taxpayers are able to contribute the maximum amount that is allowed into their Roth IRA, if their annual gross adjusted income (AGI) is less than $95,000. If you make more than $95,000 (up to $110,000), you are still able to contribute, but at a reduced maximum. If your AIG is over $110,000 you do not qualify for a Roth IRA.
If you are married and file taxes jointly, the limits are $150,000 for maximum contributions, and $160,000 for reduced contributions. Any amount over that, disqualifies you. If you are married, but file separate tax returns you do not qualify for a Roth IRA.
Retirement can be scary. A Roth IRA is a great way to start preparing for retirement.
What Is A Roth 401K Plan?
Many employers have a new savings plan to offer their employees: the Roth 401K plan. The Roth 401K plan combines the features of Roth IRA’S and traditional 401K plans.
If you already contribute to a 401K plan, you can still participate in a Roth 401K plan if it is offered by your employer. The combined total contributions can not exceed what the IRS (Internal Revenue Service) limits for individual plans. An employee that participates in both plans can designate the amount to go into each plan. Once the decision has been made you can not switch money among the plans.
Below are some other things you should know about Roth 401K plans:
- Employee contributions are made with after tax dollars.
- Investment growth accumulates without any tax consequences.
- There is no income limit to participate.
- Withdrawals of contributions and investment growth are NOT taxed provided you are at least 59 ½ and the account is held for at least 5 years.
- Distributions must begin no later than age 70 ½ (this is subject to change).
If your employer provides a matching contribution to a Roth 401K plan, two accounts are set up for each participant. The first account contains the employee’s after tax contributions that are distributed tax free. The second account contains the employee’s before tax contributions and any investment growth. These funds are taxable when distributed.
You should always take advantage any time your employer offers to match contributions to your Roth 401K plan. This is extra money you will have at retirement.
The Pros And Cons Of Roth IRA’S
A Roth IRA is an individual retirement plan that allows tax free growth. Here we will give you some pros and cons of having a Roth IRA.
PROS:
- You have already paid taxes on your contributions, so you can withdraw them anytime penalty and tax free.
- You can use up to $10,000 tax free if you are using the money to buy your primary residence.
- Conversion from a Traditional IRA can be done free of charge.
- Roth conversion funds can be withdrawn with no penalty. 5 years must have passed on the converted funds.
- You do not have to make decisions based on your age. If you do not need the money, you are able to leave it to your heirs.
CONS:
- Contributions are not tax deductible.
- Eligibility is based on income.
- Tax benefits may not be realized unless you live to withdraw your contributions.
- The rules that let you withdraw contributions tax free are always subject to changes by Congress.
Roth IRA eligibility is based on income. A taxpayer can contribute the maximum amount. Currently the maximum contribution amounts are $5,000. If you are 50 years or older, you can contribute $6,000.
As you can see, there are more pros to having a Roth IRA than there are cons. If you are looking for a good way to make the most of your investments, it is with a Roth IRA. Your money grows tax free for as long as you let it. When you get ready to retire, you do not want to have to worry how you are going to make ends meet. A Roth IRA is a great way to make sure you have the money you need for your future.
Investing In A Roth IRA Mutual Fund
You have decided you want to invest in a Roth IRA to make the most of your money upon retirement. For a higher rate of return than a CD (certificate of deposit) or savings bonds, invest in mutual funds.
Do you meet the income requirements? Your earned income, with an adjusted gross income on your taxes of less than $95,000. You can make a partial contribution with an adjusted gross income of $95,000 to $110,000. If your adjusted gross income is over $110,000 you are not able to contribute to a Roth IRA.
When will you need to access the money? A Roth IRA has the advantage of letting you take out money at any time without penalties or tax consequences. This is because the money you have invested is after tax income. If you have an emergency, you have access to your money.
A Roth IRA lets you keep the money invested past the age of 70 ½. If you are planning to work into your 80’s or 90’s, this could be ideal for you.
If you are self employed or change jobs frequently a Roth IRA is a good choice. You do not have to keep rolling over the money to new investment plans, it can stay in your Roth IRA regardless of where you work or who you work for.
Now all you have left to decide is what mutual fund company to invest in. Many mutual fund companies will let you access your account online, so you get to watch your money as it grows.
Setting Up A Self-Directed Roth IRA
Self directed IRA’S are becoming one of the more popular investments.
With a self directed IRA you have more control of your investments, and you can invest in non-traditional investments. Some of these investment choices could be real estate, mortgages, or even a business. Before putting your money in these investments you will need to find a custodian that will accept these investments. The custodian will help you set up a self directed IRA.
Find a custodian you feel you can work well with. You want to find someone who will listen to you, what you want to do, and help you find ways to do it. Your custodian should also be someone with experience with self directed IRA’S.
Roll your assets over into a self directed IRA. This should take about 7-10 business days. Study up on investments that you are interested in. You can invest in almost anything you can think of.
If you have the funds, consider investing in real estate. You can make a nice profit investing in real estate through a self directed Roth IRA.
As always you should have a diversified portfolio. You may want to think about pulling out of high risk investments and put your money in safer stocks and bonds.