Roth IRA Rules: 7 Things To Know About Your Roth IRA

By Kerry - 0 Comments

One of the smartest moves you can make is to invest in a Roth IRA and save taxes on income earned in the account.

Here’s how to make your after-tax cash work harder for you by opening a Roth IRA at your favorite financial institution. I’ve also included the 2010 Roth IRA Contribution Limits and Roth IRA Rules for your investing pleasure.

If you are a Canadian, check out 5 Reasons To Love Your Tax-Free Savings Account (TFSA) for the right money mix.

1. Tax-Free Growth

Roth IRAs don’t give you a tax deduction on your contribution like a traditional IRA or a 401k, but they do allow you to save up to $5,000 per year and grow it tax-free! Plus, unlike your 401k, with a Roth IRA you can invest in anything you like – including stocks, bonds, index funds, CDs, mutual funds, or real estate.

2. Lower Your Tax Bill

Because a Roth IRA offers tax-exempt rather than tax-deferred savings, it’s a brilliant savings vehicle for Americans in lower tax brackets. Those with a lower tax bill today may be in a higher tax bracket on retirement and can thus save tens of thousands of dollars in taxes when it’s time to retire.

3. Roth IRA Savings Add Up!

Over time the savings can add up. For example, let’s assume you have $25,000 invested in a standard high-interest savings account at 3%. After one year you will earn $760.40 compounded monthly. Depending on your income tax bracket, the government takes around $225. With a Roth IRA, you get to keep everything. Over 10 years compounded monthly, your savings would amount to $33,733.84.

4. Use a Roth IRA as Your Emergency Fund

Using a Roth IRA as your emergency fund is easy! You can take out your contributions (not earnings) at any time to help with emergencies, education, or to buy a home. Be sure to read IRS Publication 590 for your contribution rules and to get the calculation right.

5. Start a Roth IRA Young!

Roth IRAs can also be set up for minors, so starting earlier can pay bigger bucks over time. For example, a 25-year-old who contributes $5,000 annually at 4% could have a Roth IRA balance of $494,133 at retirement and keep up to $105,800 in taxable savings.

Just be sure to keep your Roth IRA open for at least five tax years and wait until you are older than 59.5 years before touching your earnings or Uncle Sam will tax you plus charge you a 10% chunk as a penalty. Ouch!

6. Roth IRA or 401K?: Use the Roth IRA Calculator

To figure out if opening a Roth IRA or a Traditional IRA makes sense for your income level, check out the Roth IRA Retirement Calculators at The Motley Fool to help with the Roth IRA math and cut through the confusion in a fun way.

7. 2010 Roth IRA Contribution Limits

The Roth IRA contribution limits for 2010 have stayed at $5,000 — which is the same contribution limit from 2009. If you are 50 and over, then the catch-up contribution remains at $1,000, for a total Roth IRA contribution limit of $6,000.

Easy Retirement Guides:

Your Turn: Do you have a Roth IRA? Got any Roth IRA conversion tips to share?