Roth and traditional IRAs differ in a couple of areas. You get to tax-deduct the amount contributed to a traditional IRA but pay the taxes on that money and growth when you remove it at retirement. The Roth IRA doesn't give you a tax deduction but allows you tax-free growth and no taxation on that growth when you take the funds after the age of 59 1/2. Both serve a function. If your income is low or you have a retirement plan at work, you'll find the Roth may be the best IRA choice for your situation.
Estimate the amount of money you can tuck away every payday for your Roth investment. The annual limit for each person in 2010 is $5,000 for people under 50 and $6,000 for everyone over 50. That means that a married couple under the age of 50 could invest up to $10,000.
See if you qualify to invest. It's not a problem if you don't have a plan at work, but if you have a pension, 401(k) or other plan, there are income restrictions. If you're single, head of the household or married filing separately, didn't live with your spouse all year and make less than $105,000, it's not a problem, you can contribute the entire amount. However, that amount phases out between $105,000 and $120,000, after which you no longer can contribute. For married people filing jointly, the amount is $166,000 and phases out at $177,000. If you're married filing separately but lived with your spouse, you are pretty much skunked. If you had no income, no sweat, you can have a full contribution Roth. If you made between $0 and $10,000 the amount phases out and disappears at $10,000.
Check several different companies and investments for your Roth. The closer you are to your retirement, the more conservative you should be with the money. However, if you have other taxable savings, always use the Roth for the highest yield, riskiest savings. Since the interest or return is tax-free, maximize the return and your benefit from having the Roth. The fact that this is a retirement account normally gives you more time to recoup any losses in addition to the tax-free growth benefit.
Fill out the paperwork. A Roth isn't a specific investment, just an extra paper on any investment designating the funds are for your Roth retirement IRA. Before you invest, however, check for maintenance fees. Some of these can become high percentages if you have smaller amounts in the plan. Choose ones with low or no maintenance. Once your plan grows, you can always switch it. Some plans waive the fee if you do monthly automatic investments.
Save money with the same company if you use mutual funds. While it might sound like a great idea to have one fund from one company and another Roth with funds from a different mutual fund, you'll pay for that decision. Many funds have a load -- a cost for investing that disappears as you accumulate more with their company. It doesn't all have to be in the same fund either.
Remember to give yourself the savers credit. The credit is just like paying extra money on your taxes. If you're single with income under $28,250 or married filing jointly with income under $56,500, you qualify for a 50 percent credit on everything you put into a retirement plan, including a Roth, up to $1,000 of credit for each taxpayer.
- Balance your total savings by diverting it into several kinds of investments, such as stocks and bonds. The younger you are, the more you should have in the stock market. Choose from various types of stocks such as small cap and large cap, value and growth. Each type works best in a specific financial environment.
- Roth Vs. Traditional Vs. Rollover IRA
- How Does the Roth IRA Work?
- Pre Tax Vs. Roth 401(k)
- How to Contribute to a Roth & a Traditional IRA
- Are Distributions From a Roth IRA Taxable?
- Is There a Penalty for Withdrawing Your Contributions in a Roth IRA?
- How to Transfer IRA Money to Another Institution Without Paying Taxes
- Can I Convert a Standard IRA to a Roth With No Income?