Roth Individual Retirement Account
A roth individual retirement account offers a way to save for retirement through a high interest account with a tax break at time of use. Because the money used for this account is after tax dollars, there is no need to tax again at retirement. Though this idea may not sound appealing at first, think of the day a person calls their financial advisor concerning their account only to find out 15% is not available due to the IRS taking their portion. In some instances using and individual retirement account such as roth does not make sense, however if a person is young, can make the contributions necessary, and is willing to wait for reward, this is the best plan.
There are a couple of parameters worth mentioning when deciding the right savings path to choose: adjusted gross income and extent to which a person will work before retirement. The adjusted gross income (AGI) is the incomes of both spouses or other household combinations planning on being together for life. This determines qualification for the roth individual retirement account. A household must make less than $110,000 if filing separately and $160,000 if filing jointly. In addition, there is a contribution limit set that changes each year. Check the IRS website for a specific number for the given year. Of course the limit differs whether filing jointly or separately. A traditional individual retirement account restricts the time in which a person may use the funds and with some parameters, a roth account does not have the same provisions. The money can be use at anytime, however a 10% tax penalty may occur. Additionally, unlike a traditional IRA, contributions may continue past the age of 70 and withdrawal does not have to start at this age. As long as a person is making taxable money they can contribute.
Switching funds from a traditional IRA to a roth individual retirement account is possible, but all the transferred money is taxable. There is no loss to this action because the money was not taxed in the beginning and will not be taxed again as long as the money stays in the roth. In addition, contributions to this type of account are nondeductible no matter how much a person makes in the future or changes made in employment. If a person switches funds later in life they are allocated an extra amount in an effort to equal the amount if savings had started early in life. Though the amount does not equal double and the interest cannot be gained for past years, the advantage is significant. Determining the desired lifestyle, potential tax bracket, and any additional costs associated with lifestyle changes will provide an answer concerning which retirement plan is best suited for a specific situation.
Many different options for saving are available, however only a few will work for a specific situation. The choices are narrowed once a person determines their goals for later in life, the amount of years worked before giving up work, and what other financial means a person can depend on for help. These means may include residual income, living with children, paid off mortgage, or downgrade in vehicle owned. All of these examples can dramatically change a persons financial needs as well as their financial availability. A roth individual retirement account creates availability of funds without the tax penalty at time of withdrawal. This is beneficial when planning for its use. In addition, any tax laws that change from now until the time a person retires does not affect them because the tax has already been paid on these funds. The only change in laws a person with this type of account should concentrate on is the maximum amount of yearly contribution and income qualifications. An individual retirement account may be dispersed between many different financial vehicles creating flexibility and safety in the event that something goes wrong with a sure thing. Likewise, dispersing monies can make the funds available at any time if the right vehicles are used. "And Ahab spake unto Naboth, saying, Give me thy vineyard, that I may have it for a garden of herbs, because it is near unto my house: and I will give thee for it a better vineyard than it; or, if it seem good to thee, I will give thee the worth of it in money." (1 Kings 21:2)
Determining the amount at which is affordable at the current time as well as the amount desired or required at the time of quitting work may be a difficult task, however financial professionals are available for counsel. Finding a qualified, honest, and affordable person to do the job may be another difficult task. Evaluate the fees, specific options, and knowledge of all companies before making a choice. Conducting research concerning the options available for an individual retirement account as well as the ramifications such as taxation and minimum requirements also need to be understood. Put together a list of general goals before meeting with any financial professional in order to stay on track and not get confused by other unqualified options. Even the most honest and helpful financial professionals offer some options not suitable for all cases due to insufficient knowledge of unique financial goals and availability of contribution. A roth individual retirement account probably offers the most flexibility with the highest return, however this is not the best fit for all people. Other options available may include money market funds, stocks, and bonds.
Roth IRA Contribution LimitsThinking about looking into Roth IRA rules? Wondering about Roth IRA contribution limits? Don't expect to be the only one who is beginning to think about retirement plans. The retirement of the baby boom generation has many implications for the Social Security program. Although some claim that the program is set to begin paying out more than it takes in at 2020, and that Social Security will be unable to pay full benefits by 2040, it is unlikely that these predictions will ever take place. Interested parties will no doubt be sure to institute policies to offset these dire predictions, and, increasingly, employees are beginning to take the responsibility to provide for their own retirement years. It is a sobering yet exciting position to be in to know that one's financial situation tomorrow will in some measure depend upon the financial choices which are made today.
Retirement accounts are not the total answer to the situation, and many facets of life are outside of one's personal control. This is a good time to remember that Jesus Christ said, I am the vine, ye are the branches: He that abideth in me, and I in him, the same bringeth forth much fruit: for without me ye can do nothing. (John 15:5) However, after recognizing that a person is never totally self-reliant, one tool that can be used in responsible planning for retirement is to become familiar with Roth IRAs.
There are several advantages of Roth IRAs over traditional IRAs and other retirement accounts. It is fairly easy to be able to contribute money toward a Roth IRA. There are no age limits to opening such an account, provided one can meet several general requirements. Taxable compensation (such as wages, tips, professional fees, and bonuses) must be sufficient to equal contributions. There are Roth IRA contribution limits. For 2008, these limits are the smaller of these amounts: $5,000 or the taxable income for the year for those under 50 years old, and, for those 50 and older before 2009, $6,000 or the taxable compensation for the year. Each year, adjustments to these figures will be made for inflation. Other Roth IRA contribution limits may be imposed if the modified Adjustable Gross Income (AGI) is above a certain level. The AGI is the amount on the tax return before claiming the standard deduction, any itemized deductions, or the deduction for personal exemptions. Contributions can be made any time during the year up to the tax return due date.
Some people will not be able to determine their income before deciding on the amount to contribute to a retirement account. If the income increases, or unexpected bonuses are received which puts one over the Roth IRA contribution limits, penalties can be avoided by correcting this before the day the tax return is due. This illustrates another way that the Roth IRA rules are beneficial. Not only is it fairly easy to put money in, but it is also easy to take it out when needed. Owners can usually withdraw at least some of their money before age 59.5 without a penalty. Details may vary, but generally the owner may withdraw up to the amount they have contributed without tax penalty. The account may have to have been opened for at least 5 years.
Further advantages to Roth IRA rules are the fact that contributions have already been taxed. Although there will be no current tax deduction gained from deposits into a Roth IRA, there is a tax advantage in that the money is hopefully taxed at a lower rate than retirement accounts which are taxed at withdrawal in retirement years. . One of the most intriguing benefits is that the possibility exists of having even the investment earnings be tax free. Also, all other retirement plans require withdrawals to be made based on age, while money held in such an account can continue to keep accruing interest even in latter years if that is what is desired.
A person may be able to make contributions to a Roth IRA even if he or she is already participating in an employer's retirement plan. This is true even if the contributions are made to a Roth account in a 401k or 403b plan, because the contributions are considered to be made by the employer. (Yes, the money still comes out of one's own paycheck.) The Adjusted Gross Income can not exceed certain levels. In 2008, this amount is $101,000 for a single individual and $159,000 for married couples filing joint returns.
Perhaps in promoting the many benefits of Roth IRA rules, the fact should be mentioned that there are fairly heavy penalties if a person withdraws the earnings part of the account. Federal income tax plus a 10% penalty on the amount may nudge one towards making other plans. There are several exceptions, such as the options available for taking up to $10,000 in earned withdrawals if the sum is to be used to buy a principal home. The house must be bought by the account owner, spouse or descendants. Such an owner or qualified relative must be one who has not owned a home in the previous two years. Some other exceptions exist for paying educational expenses. Be sure to check for the details which may apply to a person's particular circumstances. In researching, be certain that the information you read on the Internet is confirmed on a '.gov' site or is found on the actual IRS site, so that erroneous information does not lead to poor decisions. However, there is much to be gained by taking the time to explore the benefits of a Roth IRA.