What in the World is a Roth IRA?

Individual Retirement Account's are called IRA's for short. Individuals can put up to $2,000 away for retirement for each spouse. There are two kinds of IRA's. The first is the Traditional IRA, which is what most people are familiar with, and it has been around the longest. The second is the Roth IRA - which was made available as of January 1998.

Traditional IRA

Contributions in an IRA grow tax-deferred until you take it out and then you pay ordinary tax on the amount withdrawn. If you withdraw the money before you are 59 1/2, you will incur a 10 percent penalty.

Roth IRA

The Roth IRA is a new investment vehicle introduced by the Taxpayer Relief Act of 1997. It is similar to a Traditional IRA because investors may contribute up to $2,000 (or 100% of earned income, whichever is less) per year into the account. It is a bit different than traditional IRA's because you do not get to take a deduction for the current year that you put the money into a retirement fund, but your investment earnings grow tax-free. The reason Roth IRA's can be beneficial is that you do not pay any taxes on the money when you withdraw it. Initial Roth contributions can be withdrawn at any time penalty and tax-free, regardless of your age.

Withdrawals:

The rules to get your earned retirement money tax-free and penalty free from a Roth IRA are:

• the account has been in existence for at least five years and
  
  
• the shareholder must be at least 59 1/2 years old
  
  
• the owner has died or is disabled
  
  
• the distribution is used for qualified first-home purchase (up - to a lifetime limit of $10,000 per IRA holder).
  
  

Withdrawals can also be taken penalty-free at any time if they are used to pay for higher education expenses. Some additional circumstances where penalties may be avoided are death, disability, medical expenses, or if the investor uses a series of substantially equal periodic payments.

Who Can Contribute?

To be eligible to fund a Roth IRA, a $2,000 contribution can be made for a single person making less than $95,000 per year, or a married filing as a joint individual with an income of less than $150,000 per year. You are not eligible if you make more than $110,000 as a single taxpayer or $160,000 as a married filing jointly. Taxpayers can even contribute to both a Roth and Traditional IRA account in the same year, as long as the combined contributions do not exceed maximum allowable for either type, which is $2,000 or less. They are both excellent ways of saving.

To make sure you are a winner with your retirement funds, be sure you calculate both options very carefully based on your financial situation and emotional needs.

If you make less than $100,000,you also have the option of converting your Traditional IRA to a Roth IRA if you think the Roth would be more suitable for you. If you perform a conversion, you will have to pay taxes on any deductible contributions you made to a Traditional IRA, as well as any earnings in the account. Please see a financial advisor - preferably a CPA or an enrolled agent to determine if this is a wise decision for you.

Two Web sites that have conversion calculators online to help you do some preliminary research on the question of to convert or not are listed below. You can also calculate your savings with a Roth versus a Traditional (Deductible) IRA or a nondeductible IRA.

http://www.strongfunds.com
Select "Retirement Planning" from the Home Page Select the 5th purple heading "Interactive Tools"

http://www.troweprice.com

Select "Retirement/IRA's" on the left-hand column Select the 3rd choice "Is the Roth IRA right for you" The work sheet will then load on your computer and you just have to answer the questions. You can do it several times with different scenarios. Give yourself some time to do this one, it took a long time to download on my computer but the information was great!

Some additional factors to take into consideration are: Do you have a 401(k) or 403(b) company retirement plan that you can take advantage of? If you do, you should fund that account to the maximum before you do any other type of retirement plan.

I did the worksheet on both web sites and will be ahead by over $40,000 at retirement by contributing to a Roth IRA instead of the non-deductible or the traditional. Your situation may be different but until you work the numbers, you'll never know. And since I crunched the numbers, I have a good direction for my retirement planning. Good luck to all of you and happy crunching.

Doris Dobkins is a money saving expert, author and speaker and has helped thousands of people find ways to save money and get out of debt.

Do you have a time or money saving idea that wasn't included in this article? Please send it to tips @stretcher.com. We get the best ideas from our readers!

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