There’s only two days left to file your taxes and only two days left to open up an individual retirement account.
One of the great tax saving benefits created by Congress over the past few years is the Roth IRAA Roth IRA allows non-deductible, after-tax contributions of up to ,000 per year. As long as you hold the IRA for at least 5 years, the distributions are tax free. In addition, you are not required to make a minimum contribution each year, and there is no age limit for additional contributions. The Tax Relief Act of 1997 created the Roth IRA.. One of the reasons Roth IRAs have become so popular with seniors and baby boomers is that they offer four distinct advantages over the conventional IRA.
First, your earnings in a Roth IRA account grow tax free forever. Next when it comes time to retire, you can withdraw cash tax free. You can withdraw the principalPrincipal is the amount of money you borrow if you're getting a home loan. If you're buying a bond, the principal is the amount you're lending. Typically, you'll buy bonds with a face value of ,000. If you buy a ,000 bond, your principal is ,000. or the cash you’ve deposited into the account, tax free at any time. And if you’re a first time buyer, you can withdraw $10,000 penalty free and tax free to help purchase your first home.
There are a few limitations to a Roth IRA. First, you actually have to earn income at a job. You can’t count interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds. income from a bank account or CD. And you can’t put in more than you’ve earned. However, you can deposit up to $3,000 if you’re over the age of 50. And that’s per person, not per couple. The income limits are fairly generous as well. You can earn up to $95,000 if you’re single or up to $150,000 if you’re married before the Roth IRA benefit phases out.
Open up your Roth IRA at banks, financial investment companies or brokerage houses. Check out the fees that these companies charge to hold the Roth IRA accounts and the minimum deposit amounts.
What should you invest in? Remember that a Roth IRA is like a holding tank. If you don’[t actively choose an investment, it sits in a savings account earning 1 percent. Instead, choose cheap no-loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interest. mutual funds or even cheaper index fundsIndex Funds are stock mutual funds designed to mimic the movements of a particular index. For example, a fund trying to mimic the movement of the Standard & Poor's (S&P) 500, will either purchase every stock on the S&P 500 in the same ratio that those stocks appear on the index, or will purchase a representative sample of companies that closely approximate the index. Since index funds rarely change their holdings, they are typically cheap to hold and may do better for investors over the long haul. for your investment.
Finally, remember that putting money into a Roth IRA won’t lower this year’s tax bill. If you want to lower your tax bill, the only way to do it is with a conventional IRA, KeoghA Keogh is a retirement plan for employees of unincorporated businesses or self-employed individuals. You may contribute up to 25 percent of your earned income, to a maximum of ,000. or money purchase pension plan. With a Roth IRA, you’ll use after tax cash, that’s the money left in your checking account, but unlike all of those other accounts, the cash will grow tax free forever.
To check out how various mutual funds have performed and their expense ratios, visit www.morningstar.com
For information about Roth IRAs, try these websites.
Copyright 2004, WGN-TV
April 13, 2004