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Why You Need a Roth IRA
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One of the smartest money moves a young person can make is to invest in a Roth IRA.
When you're just getting started investing, the Roth should be your first stop -- even before you open a regular, taxable account, or contribute to a workplace retirement-savings plan. The only exception is if your employer offers a match on your 401(k) contributions.
Pay taxes now, spend more later
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You will never retire on the money you save for retirement; you will retire on the money you make on the money you save for retirement.
To make money on your retirement investments, get as much as you can into a Roth IRA as soon as you can. All of your profits will be free from income taxes after you hold them in your Roth IRA at least five years.
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In late July the Vanguard group sent 170,000 customers a form letter innocuously labeled: "Change in beneficiary policy will help you simplify your planning." A more candid heading would have been: "Warning! Unless you act, we're about to change who gets your Individual Retirement Accounts when you die."
When FORBES showed Vanguard's letter to IRA experts, they were outraged. "This borders on the unconscionable," fumed Green Bay, Wis. CPA Robert Keebler. "It's crazy. I don't see how they can change the beneficiaries on your accounts without your consent,'' said Boston lawyer Natalie Choate.
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"I think people of all ages should be thinking about Roth IRAs, especially those who are young," Fahlund said. Otherwise, if you put pretax money into a savings plan at age 20 and leave it in until age 70 1/2 when you are required to begin withdrawals, "you have been growing taxes for Uncle Sam" for 50 years.
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Starting January 2006, the Tax Act gives 401(k) plans the ability to offer participants a “Roth” option. Like its IRA cousin, contributions would be made from after-tax dollars, so you wouldn’t get a tax deduction for contributing to this part of your 401(k).
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This One:Getting going: Beating the taxman in retirement
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Here are four reasons retirees may want to convert their regular IRA to a Roth IRA.
- If you are in a low tax bracket, the income-tax bill will be modest.
- You get tax-free growth thereafter.
- No distributions are required during your lifetime.
- If you convert to a Roth and pay the necessary taxes, you will shrink your taxable estate -- and you'll be able to bequeath a pool of income-tax- free money to your heirs.
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...there is no easy answer to the Roth IRA conversion question. All of us must examine this issue using our own set of circumstances to determine the pros and cons as they pertain to our situation.
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Roth conversions are allowed only for taxpayers with "modified adjusted gross income" of $100,000 or less--before the income recognized from a conversion is counted...As of 2005 those 70 1/2 and older, who are forced to take distributions from a traditional IRA, won't have to count those forced minimum payouts in calculating that year's modified adjusted gross income.
...you can leave all of the Roth to your children or grandchildren and they will have years or even decades (depending on their ages when they inherit) to deplete it.
Converting to a Roth is essentially risk free in the short term...
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If you're confused about which type of retirement account to choose, here's the quick and easy (and probably smartest) strategy: Put your money in a Roth IRA.
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Representatives Rob Portman, a Texas Republican, and Benjamin Cardin, a Maryland Democrat, are preparing legislation that would allow individuals to increase their IRA retirement plan contributions to $5,000 for those under age 50 and $6,000 for those over 50, the Wall Street Journal reported.
