Roth IRAs
are more recent additions to the
world of retirement investing. The advantage they offer over traditional
IRAs is that, while you make after-tax contributions to a Roth,
the earnings that accumulate in your account are tax free. As
long as you're at least 59 1/2 and your account has been open
for five years, you don't owe tax when you withdraw money. This
is usually a good deal for young investors, since your tax bracket
when you're starting out is probably lower than when you begin
making withdrawals. And there is no required withdrawal age, so
you can let the account build as long as you like.
If you need money from your Roth IRA before you
turn 59 1/2, you can make a withdrawal and pay tax at your regular
rate on any earnings. In most cases, you'll also owe a 10% early
withdrawal penalty. The same exceptions — including buying
a first home and paying for college or qualified medical expenses
— apply.
Eligibility
for a Roth is determined by your
adjusted
gross income (AGI).
If your AGI is below $101,000 you
can contribute the full $5,000 to a Roth IRA in 2008. If your AGI is under $116,000 you can still contribute
a portion of that $5,000 to a Roth, and the rest to a non-deductible
IRA. For married joint filers, the limits are $159,000 for full
deduction, and $169,000 for partial.
Although you pay taxes on
your contributions to a Roth IRA, you're not taxed when you make withdrawals.
This is one reason young investors should consider opening a Roth.
Your tax rate increases with your salary, so you'll probably pay at
a higher rate later in life. By paying tax on your retirement savings
now at a lower rate, you may save money in the long run.
