Did you know that many people spend more time planning their vacation than planning for retirement? Although there are many ways to save for your retirement, if you are like most people, you aren’t taking full advantage of them. For example, do you understand the basics of a Roth IRA? If not, here’s a little Roth IRA 101.
Right now, you may be wondering why you should invest in a Roth IRA if you currently have a retirement plan with your employer. The Roth IRA has many benefits that other retirement plans don’t have, and chief among them is the fact that any investment earnings may accumulate tax-free. In other words, your Roth IRA has the opportunity to grow without incurring any taxes and can be distributed to you tax free, if certain conditions are met.
While there are advantages to owning a Roth IRA, there are also some rules to think about before you decide this is the account for you. First, not everyone can take advantage of a Roth IRA. You or your spouse must have earned income or compensation – this includes wages, tips or salary. However, be aware that earned income or compensation does not include rental, interest, dividend, pension annuity or deferred compensation income. Second, your modified adjusted gross income cannot exceed certain limits. For single people, your modified adjusted gross income must be less than $114,000 and $166,000 for married couples filing jointly.
Contributions you make to the account are not tax deductible but may be withdrawn any time without tax or penalty. Before taking withdrawals from your Roth IRA you need to determine if you are receiving a “qualified distribution.” Any withdrawal that is not a “qualified distribution” can result in income taxes and IRS penalties. For example, any earnings on your principal will be subject to income taxes should you decide to withdraw them prior to the five-year holding period or before age 59 ½ (contact your state department for state taxation rules). In addition, these earnings are also generally subject to a 10% IRS penalty.
Tax and penalty free withdrawal of your Roth IRA earnings for “qualified distributions” can be made once a five-year holding period is satisfied and one of the following applies: you have reached age 59 ½, you have become disabled, the funds are used for a first-time home purchase (subject to a $10,000 lifetime limit) or the funds are distributed to a beneficiary after your death.
After thinking over the rules, if you are eligible for a Roth IRA you may be wondering how much you can contribute. For 2008, you may make regular contributions that do not exceed $5,000. If you are 50 or older, you can also make “catch-up” contributions of up to $1,000 per year for a total contribution of $6,000.
A couple of other important items worth noting – contributions to your employer’s retirement plan do not exclude you from making contributions to a Roth IRA, and owning a traditional IRA does not prevent you from setting up a Roth IRA either (although contributing to a traditional IRA for the same year will limit the amount you can contribute to a Roth IRA).
Whether or not you decide a Roth IRA is the right retirement account for you, it’s always smart to plan ahead and save money for the future. Never underestimate the importance of saving for retirement and using a variety of investment vehicles to achieve your goals.
Arvest does not provide offer tax advice, please consult your tax specialist. Brokerage services provided by Arvest Asset Management, member FINRA/SIPC and a subsidiary of Arvest Bank. Securities, mutual funds, and insurance products are:
