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Ready to Roth?
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November 27, 2000: 7:23 a.m. ET
Three basic facts about the Roth IRA that are worth knowing
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Seems like everyone has a Roth IRA these days. Aunt June can't stop talking about the retirement plan after she opened one. Your dentist touted the tax advantages of the plan while doing your root canal last week. Even your massage therapist spouted off during your weekly back massage about how she's saving for retirement.
"Younger people especially, I urge them to open a Roth," said Bob FitzSimmons, a certified financial planner (CFP) in Lincoln, Neb. "Being able to get tax-free withdrawals is very powerful, so the general notion is you should look to the Roth IRA right away."
Are you eligible?
Like many people planning for retirement, you keep hearing about the Roth IRA which was introduced by Sen. William V. Roth, Jr., R-Del., as part of the Taxpayer Relief Act of 1997. It was designed to encourage Americans to save for their golden years.
The Roth IRA is like the traditional IRA in that it's a long-term account which lets you invest your money in a variety of mutual funds. Under the Roth, though, your contributions are not tax deductible, but the withdrawals are tax-free when it's time to retire.
So who can join? Well, you can begin contributing to a Roth IRA whether you're hitched or still living the single life.
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Being able to get tax-free withdrawals is very powerful, so the general notion is you should look to the Roth IRA right away.
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Bob FitzSimmons
CFP
Lincoln, Neb. |
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The main factor is your adjusted gross income, which is your annual salary plus any taxable income such as investment dividends, capital gains, or self-employment income.
If you're single, you can open a Roth IRA if your adjusted gross income is less than $95,000. If you earn between $95,000 and $110,000, the maximum amount you can contribute each year is reduced proportionately. For example, a taxpayer with adjusted gross income of $102,500 can contribute only $1,000 to a Roth IRA, according to the IRS. Remember that if you're single with an adjusted gross income of more than $110,000, you can't open a Roth IRA.
Now let's say you're married. You can open a Roth IRA if you file jointly with an adjusted gross income of less than $150,000. But if you and your spouse's combined adjusted gross income is between $150,000 and $160,000, you are limited in your contributions
Contribution limit is $2,000
You've got your calculator revved up and pencil hand figuring out your savings. You should know that the maximum amount you can stash in a Roth IRA is $2,000 a year. The same limit applies to traditional IRAs.
That may not seem like that much money today, so lawmakers are planning to increase that limit since it was originally introduced decades ago. Many financial planners say it's a long time coming.
"Eventually (lawmakers) will raise it because it's been $2,000 since the 1970s," said CFP Marc Collier in Wellesley, Mass. "It's about time they raise it because of the rate of inflation."
Under a Roth IRA:
*You are still allowed to contribute even if you have an employer sponsored plan such as a 401(k).
*Distributions of earnings and principal are tax-free if you're at least 59-1/2 and the account is at least five years old.
*Early withdrawals can be made penalty-free for a first-time home purchase and college education.
*You're not required to begin distributions at age 70 1/2.
Click here for more info on the Roth IRA from the IRS
Go to a bank or mutual fund company
You're ready to open a Roth but not sure where to go. You're full of questions: "Is there a lot of paperwork involved?" "What are the initial investment requirements?"
First, most banks and large mutual fund companies offer the Roth IRA so it's as easy as calling or walking in and inquiring about an application.
Also, many fund families do require minimum investments when opening mutual fund accounts – some are as high as $2,500. But Collier says many companies either waive the fee or reduce it considerably when opening IRAs to encourage investors to start saving for the long haul.
"It's a good way for someone to begin to enter mutual funds," Collier said.
Check how your mutual funds are doing
And keep in mind when you're choosing which funds to invest in as part of your Roth IRA, younger investors will want to consider more aggressive picks.
Conversely, if you're an older investor much closer to retirement, you should lean towards choosing income funds because they can shelter your dividends from taxes, Collier said.
-- Staff Writer Jennifer Karchmer covers news about 401ks and IRAs for CNNfn.com. 
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READY TO ROTH
