A Roth IRA account is absolutely indispensable, and one of the smartest money moves anyone can make. It is a very convenient way to give yourself access to a stream of tax free income during retirement. Unlike a traditional IRA, where your annual contributions are often tax-deductible and earnings are taxed, contributions to a Roth are taxed, but the earnings are tax-free. If a 25-year-old contributes $5,000 each year until he/she retires and makes an average annual return of 8% on his/her investment, he/she will have $1.4 million saved by the time he/she retires at age 65. And the cash is all yours since it’s completely tax-free!

Basic Roth IRA Profile

• Contributions are not tax deductible
• No Mandatory Distribution Age
• All earnings and principal are 100% tax free if rules and regulations are followed
• Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
• Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
• Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions)

 

Why is a Roth IRA Better than a Regular IRA?

Roth IRA’s, with a few exceptions, grow income-tax free and owners are not required to begin taking minimum distributions at age 70½. Your Roth IRA can continue to grow tax-free for as long as you own it. Regular IRAs grow tax-deferred, and both the original investment and the growth will be taxed when the money is withdrawn. The disadvantage of the Roth IRA is that you do not receive a tax deduction when you make a contribution. In effect, Congress is taxing the seed (your contribution), but you reap the harvest (your withdrawals) tax free. In contrast, with a traditional IRA, you are not taxed on the seed, but your harvest is taxed.The exception to our preference for the Roth over the regular IRA would be when you can anticipate that your income tax bracket will be lower later. However, even with a lower tax brackets in retirement, the Roth IRA can still be a better choice unless a short investment period is anticipated.

Where can I open an IRA?

Whyle a Roth IRA can be opened at most financial institutions, a discount brokerage such as eTrade or TD Ameritrade is your best bet.

Two key things that you want to consider when choosing where to open your IRA are fees and trading commissions; since you want to make sure that the bulk of your contribution is going to your retirement and not fees and commissions.

How much money do I need to open an IRA?

Minimum opening amounts differ by institution, but are dramatically less than other types of investment accounts. Deposits into your IRA do not have to be made all at the same time. For example: In 2008, you can deposit $416.67 into your IRA each month. At the end of the year, it would add up to the maximum $5,000.)

How much can I contribute to my IRA each year?

The Roth IRA contribution limit for 2008 is $5000 for those under 49 and $6000 for those over 50. After 2008, the contribution limit will raise in increments of $500 depending upon the level of inflation.

Good for Estate Planning

A Roth IRA isn’t just good for you, it is also good or your heirs. As a matter of fact, many investors are using the Roth IRA as an estate planning tool. If you leave a Roth IRA to your heirs the money continues to grow tax-free providing your heirs with a lifetime stream of tax-free income.

Where can I find more information about ROTH IRA Accounts?

Take a look at the IRS IRA Online Resource Guide website here for more detailed information about ROTH IRA accounts.

Final Thoughts

So many people do not bother saving for retirement. They are young and retirement savings is not anywhere on their agenda. But opening a Roth IRA early and investing in dividend paying stocks will pay off big time over the long run. It is a win-win situation, not only are you benefiting from the power of compounding but your income is also tax-free. So if you haven’t opened one yet, please do yourself a favor and open a Roth IRA this year. It will do you a ton of good in the long run and you’ll thank yourself later.

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