Roth IRA – Part 1

I have had some people asking me about the Roth lately so I thought I would put together a few posts about it.  There are a lot of confusing articles out there about Roth details and also what the upcoming changes are in Jan 2010.  And because of the density of material concerning a Roth IRA I decided to break it up into 3 posts that will get more advanced chronologically.

First off wikipedia has a great background/definition on the Roth that I don’t want to fill this post up with.  So here is the link for reference.

With all the concern regarding the instability of Social Security and the lack of choices in people’s 401k’s, people are searching for ways to secure their financial future.  The Roth IRA gives you the ability to invest your after-tax dollars today, let the investment grow tax-deferred, and take qualifying withdrawals tax-free.  Okay I know that was a mouthful… I won’t leave you hanging.. let me break it down.

1. Ability to invest your after tax dollars today – Meaning this is the money that has already gone through the tax monster and hit your bank account.  This is an important distinction because a Traditional IRA gets the money before the tax man.  The advantage with the Roth is that the principal amount is never subject to taxes or penalties in the future, as long as you stay within the contribution guidelines.  In a Traditional you get hammered by the tax man when its time to pull out and the worst part is that you are usually at your highest tax bracket when this time comes.
2. Onto growing tax-deferred;  this means that the money in your Roth account is not taxed at the end of the year when you have capital gains, dividends, or interest.  So when you have that 50% gain from your wise investment choices Uncle Sam can’t touch it!
3. Lastly taking qualifying withdrawals tax-free.  I have to make one thing clear and that is that all your direct contributions (a.k.a your principal) can be pulled at any time tax free without reason, where a Traditional IRA will nail you with taxes and penalties.  There are also opportunities where you are able to take out principle and earnings tax free.  For this you need to have your Roth open for at least 5 years and second the withdrawal must be made after the occurrence of one of the following events:  (a) age 59 1/2  (b) death  (c) disability  (d)  first home purchase

Continued on full post…..

So with these perks in mind you might be wondering how I get started or can I switch out from my Traditional IRA and I will get into all of that more in Part 2.  For starters though there are some qualifications at the current time that you must be able to meet (keep in mind that these qualifications are going away in Jan 2010, which i will be getting into in Roth IRA part 3).  Your MAGI (Modified Adjusted Gross Income) cannot exceed the following:

• Single filers: Up to $105,000 (to qualify for a full contribution); $105,000-$120,000 (to be eligible for a partial contribution)

• Joint filers: Up to $166,000 (to qualify for a full contribution); $166,000-$176,000 (to be eligible for a partial contribution)

Contribution limits (amount you can deposit to your Roth) for 2009:

• Age 49 and below:  $5000 per year
• Age 50+ : $6000 per year