Roth IRA Investing Basics - Financial Planning and Wealth Building for Your Retirement

By Kelly Lucas

A Roth IRA is an Individual Retirement savings Account best known for
providing tax free earnings growth and tax free retirement
distributions. Individuals can contribute up to $4000 a year ($5000 if
50 and older) from after-tax dollars, and in return may receive tax
free retirement income, provided all rules are met.

KEY POINT: In order to receive tax free retirement distributions:

1) you must be 59 1/2

AND

2) your Roth IRA must be at least 5 years old.

Hint: A Roth IRA is not an advisable investment option if you plan to
retire within the next 5 years.

Roth vs Traditional: What makes the Roth IRA different from a Traditional IRA?

KEY DIFFERENCES:

Roth IRA: Pay Taxes Now, Not Later:The Roth IRA is Tax-Exempt
--meaning retirement income is tax free.

Contributions come from After-Tax dollars (not deductible)

Retirement Distributions are Not Taxed (when rules are met)

IRA Investment Earnings Grow Tax Free

No required Distributions (you never have to use the money)

Has Income Restrictions

No Age Restrictions (can make contributions at any age)

The Traditional IRA is Tax-Deferred = Pay taxes later

Contributions come from Pre-Tax dollars (tax deductible)

Retirement Distributions are Taxed at a future Tax Rate (when
distributions are taken)

IRA Investment Earnings Grow Tax Deferred

Required to Take Distributions by age 701/2

Has age restrictions (Can no longer contribute after age 701/2)

No Income Restrictions

2007 Roth IRA Contributions

How Much Can I Contribute to my Roth IRA?

In general, the maximum amount an individual can contribute to a Roth
IRA is $4000 ($5000 if age 50 or older) in a single year. The specific
time frame for making 2007 contributions is from January 1, 2007 to
April 15, 2008.

You can contribute up to 100% of your earned income or $4000 ($5000 if
50 or older), whichever is less, MINUS any other IRA contributions you
made the same year.

For instance, if you made $58,000 in 2007 and contributed $3000 to
your other IRAs (excluding any employer sponsored plans), you are now
eligible to contribute only $1000 to a Roth IRA.

Or let's say you only made $2400 in 2007. You can only contribute
$2400 to your Roth IRA, provided you made no other IRA contributions
in 2007.

Earned income: is any compensation you received for providing a
service or product. It does not include investment income from
interest, dividends, or capital gains.

HINT: Alimony that is taxable is also included in calculating earned income.

2007 Income Limits

The income guidelines for contributing to a Roth IRA are as follows:

1. To be eligible for making the maximum contribution of $4000, your
modified AGI cannot exceed $99,000 if you are single, or $156,000 if
married and filing jointly.

2. Your contribution is reduced if your modified AGI falls between
$99,000 and 114,000 for singles, and between $156,000 and $166,000 if
married filing jointly.

3. If filing married with a separate return AND lived together for any
part of the year, the income restriction is severely limited. The full
contribution is permitted if your income is zero dollars. A partial
contribution is permitted if your income falls between Zero and
$10,000.

Establishing a Roth IRA

Anyone can open a Roth IRA and the process is very simple. Banks,
Insurance Companies, On line Brokers, and other financial firms
typically offer Roth IRAs in addition to other types of IRAs. When
opening an IRA you will need to designate it as a Roth IRA. . (For
more info, see "How to Set Up An IRA: A Step by Step Guide") You can
also rollover or convert your Traditional IRA into a Roth IRA.

Tax Implications: Planning for the future

There are basically two schools of thought regarding IRAs and tax
consequences. The first school of thought says the traditional IRA is
the way to go because when you retire you will have less income to be
taxed, thus a greater tax savings. The second school of thought says
hey, we don't have a crystal ball to know what the future tax rates
will be, but we do know they will be higher than they are now. These
people find the Roth IRA to be the most attractive choice because
paying taxes today may mean saving a bundle of taxes later, when you
can least afford it.

Then there are folks who realize the world is not black and white and
will seek a mixed bag of Traditional and Roth IRAs to round out the
tax consequences in retirement. It really comes down to individual
circumstances and personal goals.

The Roth 401k

In conclusion, let us give thanks to the late former Senator from
Delaware, William V Roth. He pushed for the creation of the Roth IRA
and finally in 1998 it made its first appearance. And, you guessed it,
the Roth IRA has now evolved into a 401k, which was first introduced
in 2006. The Roth 401k is sure to gain popularity just as the Roth IRA
did when it was first introduced.

Author Kelly Lucas, is a successful Freelance Writer with a specialty
in writing web copy and content utilizing the most advanced and up to
date optimization techniques. Her first book is expected to be
released and available for purchase in early 2008: "A Web Content
Style Guide: Web Content Optimization"

www.WebContentWritingServices.com

Find out more about Kelly's Writing Services and Web Promotion
Services. Consultations are always free and prices are the most
affordable.

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