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Roth IRA: If You Don't Have One, Here's Why You Should Seriously Consider One... Especially NOW

While 41 percent of U.S. households own Individual Retirement Accounts (IRA), only 17 percent made a contribution in 2004, according to a study by the Washington-based Investment Company Institute.

If you've been thinking about starting a Roth IRA, or making a contribution, there's still time to do so for 2005 -- but the deadline is a fast-approaching April 17.

Roth IRA

Deciding how to save for retirement is confusing ... but starting a Roth IRA is simple.

Why Start a Roth IRA?

An IRA is widely considered to be one of the best ways to save for retirement, after an employer-sponsored retirement plan such as a 401(k). People are living longer than ever, so your retirement savings may need to last you 30 years or more ... and experts estimate that you will need at least 85 percent of your pre-retirement income just to maintain your current lifestyle.

If you plan on moving to Hawaii, taking a round-the-world cruise, spoiling the grandkids or otherwise retiring in luxury, you will need even more.

The benefits of a Roth IRA are that you:

  • Accumulate earnings on a tax-deferred basis

  • Withdraw earnings tax-free for qualified distributions

In other words, when you invest in a Roth IRA, your contribution is not deductible from your taxable income. However, when it comes time to cash in your earnings upon retirement, you do not have to pay taxes on the money because, essentially, you did so when you first invested it.

Further, with a Roth IRA, you can withdraw your contributions at any time without a penalty (withdrawing earnings is penalized, however).

For instance, if you invested $2,150 in a Roth IRA that earns 8 percent a year, in 25 years you would have accumulated $14,724 -- that you would not have to pay taxes on.

This is the primary difference between a Roth and a Traditional IRA. With a Traditional IRA, your contribution is tax-deductible, which will lower your tax. However, when you withdraw money from a Traditional IRA, it is taxable.

Roth IRA: Who's Eligible and How Much Can You Contribute?

You can contribute to a Roth IRA at any age as long as:

  • You have earned income (or you are a non-working spouse)

  • Your income is under $95,000 a year for singles

  • Your income is under $150,000 a year for joint filers

If you meet these requirements you can invest:


Want to retire in the lap of luxury? Max out your annual Roth IRA contributions.

  • A maximum of $4,000 a year for 2005 and 2006

  • An additional "catch-up" contribution of $500 for 2005, and $1,000 for 2006 if you are 50 years or older

If you can, it makes sense to invest the maximum amount. If you were to begin investing $4,000 a year at age 25, and earned an average annual return of 8 percent, you'd have over $1 million saved by the time you retired at age 65. (On which no taxes would need to be paid.)

You should take advantage of this now. As it stands, IRA maximum annual contribution limits are set to return to $2,000 in 2011, unless future legislation continues the increased limits.

Roth IRA Extras

There are other benefits of saving with a Roth IRA that make it stand out from other retirement savings plans.

If You Need it, the Money is There. In an emergency, you can withdraw money from your Roth IRA -- tax-free and without penalty. However, the money must be from your contributions. If you take out your earnings before retirement (age 59 1/2), you'll owe taxes and a 10 percent penalty.

It Can Help You Buy Your First Home. You can take up to $10,000 out of your Roth IRA -- including earnings -- and pay no taxes or penalties if you use it to buy your first home. The account must have been open for five years before you can take advantage of this offer. (If you take money out for a home purchase before the five-year mark, you'll owe taxes but no penalty.)

Remember, the deadline to open, or make a contribution to, a Roth IRA for 2005 is April 17. (And be sure to designate that it's for tax year 2005 if you want to get ahead.) There are many providers out there -- banks, mutual funds, brokerage firms and insurance companies. Ask about any start-up fees, membership fees, withdrawal fees and investment fees before deciding on one.

A Roth IRA can be set up in person but many providers also offer online setup. And to make things even simpler, most also offer automatic investing, which allows you to have a set amount automatically added to your Roth IRA every month.

Happy saving!

Recommended Reading

10 Key Tax Law Changes You Need to Know For Preparing Your 2005 Taxes

Tax Audits: What Signs Make You More Likely to be Audited by the IRS?


Kiplinger's: Why You Need a Roth IRA

The Desert Sun: Do You Know Which IRA's Right for You?

Kansas City Star: Bolster Your Retirement with an IRA

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