I’m sure you all are aware that the tax deadline to file this year is April 16th. Fortunately this blog IS NOT about filing your taxes but on making a contribution to an individual retirement account, Roth IRA, before the tax deadline to count for 2011 (APRIL 16th!). What exactly am I talking about?? Ok, let me take a deep breath and give you the 411 (or the 1-2-3) on what I’m trying to say. Ready??
- What exactly is a ROTH IRA??? Basically it is an individual retirement account that offers tax free income when you retire (unlike a Traditional IRA). This means the money you make over time will not be subject to federal income tax ! You would owe the government NADA!!!!
- Why should I care about a ROTH IRA?? Great question! As stated above the Roth offers tax free income at retirement. This is VERY beneficial especially if you expect tax rates to increase (which, ummmm, they probably will!!) and/or you expect you tax bracket to increase in the years of retirement (hey, you’re making more moo-lah baby!!!)
- So, how does the ROTH IRA work? In a nutshell, you contribute using after tax money (unlike a Traditional IRA or 401K that takes funds pre-tax). You are allowed to contribute up to $5K per year with some income limitations (see #4). What makes the ROTH so nice (compared to the 401K) is it offers more flexibility in how you invest the funds. The opportunity to invest in things like real estate, stocks, bonds, CDs, is available to you through a ROTH.
- And what are the rules attached to a ROTH? Of course with something so good there MUST be a few catches!! Uncle Sam says in order to be eligible to contribute to a ROTH your income level can not exceed $107,000 (single) and $169,000 (married) for 2011. For 2012 the income increased to $110,000 for single and $173,000 for married. In addition, you can not contribute more than what you earned in a given year. Therefore, if you only made $1,000 in 2011, you can ONLY contribute $1,000 for 2011. There are more stipulations you should be aware of. Check out Uncle Sam’s website for more: http://www.irs.gov/retirement/participant/article/0,,id=211358,00.html
- How much can I contribute?? You are allowed to contribute up to $5K to a Roth IRA for the 2011 and 2012 tax years.
- What other ways is a ROTH beneficial to me? To start, the Roth is intended for retirement purposes (hence the name individual retirement account), BUT it can act as an additional savings cushion if needed. The contribution portion (i.e. the money you put in) can be withdrawn at anytime without penalties prior to the 59 ½ age requirement. Please note: the earnings portion of the fund CAN NOT be touched prior to 59 ½ without incurring penalties and taxes. Now, Uncle Sammy was gracious and allowed us to withdraw from the Roth without penalty (earnings too!) for the purchase of our 1st home or to fund education as long as we’ve had the account open for 5 years.
- How can I open an account? Opening an account is easy! Check with your bank or with online banks like ing direct (go to: http://ingdirect.com) to see which individual retirement account options best fit your needs. Make sure there are no fees!!
I really hope this helps! Please send feedback and comments and let me know your thoughts