Comprehending The Essentials

Why Comprehending the Essentials Will Assist Improving Your Roth IRA Potential

Among the many preparations needed for retirement and estate planning, retirement savings provide a fantastic tax shelter. However, to maximize those tax savings you have to understand the Roth IRA rules and requirements.

Basically, the contributions you make to a traditional retirement plan are done on a pretax basis – employers match your contributions and those contributions are tax-deductible.

With a Roth IRA, the contributions aren’t deductible, but income earned and future withdrawals are tax free.

To learn more about Roth IRA and traditional IRA rules, read on for information that can help you amp up your savings and earnings.

The Roth IRA

ROTH IRA contributions are limited at $5000 per tax year. However, if you’re 51 or over, you can contribute up to $6000 to a Roth IRA. In 2009, those contribution limitations are expected to increase based on current inflation rates. They will go up in $500 increments.

Unfortunately, Roth IRA contributions are subject to eligibility limitations too. For example, a married couple that jointly earned between $150,000 and $160,000 or higher, or a single individual who earns $95,000 to $110,000 or higher can’t contribute to a Roth IRA. Instead, they must depend on a 401(k) Roth.

The 401(k) Roth Plan

Employees can now opt to make some of their elective retirement contributions Roth contributions. Historically, any deferred salary or 401(k) contributions were deducted from your taxable wages. However, any contributions considered Roth contributions to a 401(k) Roth are now included in a person’s taxable wages, though they may be free from federal income taxation.

The beauty of a Roth 401(k) is that there are no income restrictions on it. That means that no matter what your Modified AGI is, you can make contributions to a Roth 401(k). Also, the contribution limit is much higher. For those 50 and under, it’s $15,000 and $20,000 for those over 50. There’s also potential of a greater return on investment (ROI) thanks to the higher contribution limits.

Converting a Traditional IRA to a Roth IRA

To make the conversion from a traditional IRA to a Roth IRA, you must have an AGI (Adjusted Gross Income) of less than $100,000. If you are married but filing separate forms, case conversions are typically not allowed. And though the amount converted is considered taxable income, any future growth will be tax-free. Another benefit? There are no minimum distribution requirements at age 70.

If you’re concerned about the Adjusted Gross Income restrictions currently in place for Roth IRA conversions, there is good news on the horizon. After 2010, new Roth IRA rules will eliminated the $100,000 income limit on conversions from traditional IRAs to Roth IRAs. Also, any taxes due on 2010 conversions can be paid in a two-year installment.

If you are sensible and a planner you will want to start sorting out your retirement as early as you can. A supplemental retirement plan will give you the financial security that you need when you get older and you can request one from your work place.

Here’s a basic run down of how a supplemental retirement plan works: You agree to save a certain amount towards your old age direct from your paycheck and the Government doesn’t tax the money as a reward for planning ahead. The taxes are deferred until you actually withdraw the money later in your life.

Last year you could only deposit a maximum of $15k into your supplemental retirement plan but that number varies every year. Most places of employment match you dollar for dollar so whatever you add into your account, they will too. This can quickly grow to a substantial sum and will mean you will be self sufficient come retirement age.

Your savings don’t just sit tight in a bank. You will have to decide whether you want to invest in stocks, bonds, market funds, real estate etc. A lot will depend on how much you are saving per year and be aware that some of these options come with management fees so you will need to take these costs into consideration when planning out exactly how much you will have to come when you retire.

To get started, ask at your place of work about a 401k form. When you are investing though, it is always best to meet with an accountant or financial advisor to make sure that you are making the right choices with your money, and to learn ways to tell whether or not your money is growing for you.

One of the biggest plus points of a supplemental retirement plan is that nothing is set in stone. You can change the amount you invest each year, even each month if you wish. People find this flexibility comes in handy at certain points in their life. A wedding coming up, a first born due etc.