Roth IRA Investing

Before going into Roth IRA investing...

What is a Roth IRA?

IRA stands for Individual Retirement Account. There are multiple types of IRA's -- a Roth IRA is one of those types. In a Roth IRA the government allows to you make tax free returns. However, unlike a 401k or traditional IRA, you must put money in the account that has already been taxed. You can contribute to both a Roth IRA and a Traditional IRA in the same year, but the total contribution to both must not exceed the contribution limits. However, one of the two is likely to be better for you, so you should probably focus your efforts on that one. Most people agree that the Roth is better for most people.

You can only contribute, as of 2009, $5000 per year to a Roth IRA if you are 49 years or younger. You can contribute an extra $1,000 if you're over 49. The limits will scale up in the future with cost of living in $500 increments.

What are the advantages of Roth IRA investing?

• You can pay the taxes on earnings today. From that point forward, any earnings on the money within the Roth IRA account will not be subject to taxes.
• Unlike a Traditional IRA, the government never forces you to take distributions from the Roth IRA.
• You can pass the Roth IRA to your heirs.
• Since contributions are post-tax, you can effectively contribute more money than a Traditional IRA because the limits are the same. The Traditional IRA is in pre-tax dollars. Therefore, contributing $3,750 to your Roth IRA is the equivalent of contributing the full $5,000 to the Traditional IRA - assuming you're in the 25% tax bracket.

What are the disadvantages of Roth IRA investing

You must pay the taxes now. If you're in a high tax bracket now, but plan on being in a low tax bracket during retirement, it may make more sense to not use a Roth IRA. However, it is difficult to know what the tax brackets will be in the near future - much less the distant future.

Should I invest in a Roth IRA?

If your employer matches contributions to your 401k and you've already met that and you aren't close to retirement, then I would say yes. I love the Roth IRA. I prefer the tax free returns and the relative lack of restrictions on it compared to the traditional IRA.

How do I invest in a Roth IRA?

Any provider of investments can open a Roth IRA for you - mutual fund companies, brokers, etc. I recommend investing through a company that offers a no fee IRA.

return from Roth IRA Investing to Investing for Retirement

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