Retirement Planning: Basic Facts about the Roth IRA

People are hesitant to invest money for retirement in the Stock Market for fear of their investment losing value and not recovering by the time they need it most. The Roth IRA is an option worth considering. Here is some basic information about the Roth IRA and how it is different from the Traditional IRA:

The Roth IRA became available on January 1, 1998 as a result of the Taxpayer Relief Act of 1997. It is named after the late Senator William V. Roth, Jr.

Unlike the Traditional IRA, the Roth IRA does not allow a deduction for contributions but it does provide other benefits not available under the Traditional IRA. In most cases all earnings are tax free when you withdraw the funds. There are other benefits unique to the Roth IRA including no need to take minimum distributions at the age of 70-1/2 and no distribution penalty on certain withdrawals.

There are things to consider when deciding which type of IRA is right for you. The biggest advantage of the Roth IRA is not having to pay income taxes on the investment earnings. The price to pay for this advantage is that you don’t get a tax deduction for the contribution to a Roth IRA.

Choosing the type of IRA to invest in is a very personal decision. Which tax advantages are the most important to you; those associated with the Traditional IRA or those with the Roth IRA? When do want to begin withdrawing the money? What tax bracket do think you will be in when you begin taking distributions? How much do you anticipate the earnings to be?

No matter how you look at it, most people are better off with the Roth IRA because it is an investment of after-tax money with no taxes to be paid on the interest it earns. Maximizing your contribution will add greater tax leverage to your retirement savings.

Almost any one can contribute to a Roth IRA. The contribution amount can be up to $5,000 for the year 2009 ($6,000 for those who will be 50 years old or older by the end of the year). You must have earned income of at least the amount you contribute and your adjusted gross income must be less than $105,000 for a single person and $166,000 for married couples filing a joint tax return. If your income is higher, the amount allowed for a contribution is reduced; the more you make, the greater the reduction.

You may be eligible to convert your traditional IRA to a Roth IRA if you meet income requirements but there is a conversion tax to pay. In most cases, the savings and tax benefits of the Roth IRA far outweigh the conversion tax.

This is just an overview of how the Roth IRA works. Now that you have an idea of the benefits associated with a Roth IRA you should talk to a professional to get more advice and answers to any questions you may have. In any event, it’s never too early to begin saving for your retirement.

Michael McGee is a financial advisor who understands all the terms and conditions and income tax advantages to investing in a retirement plan. Michael is well-qualified to analyze your financial situation and to advise you as to what type of investment account to have to secure your future.

Michael serves clients in South East Michigan, Oakland County, Southfield, Royal Oak, Rochester, Troy, West Bloomfield, Wayne County, Detroit, Livonia, Plymouth, Canton, Westland and neighboring cities and communities.