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Saturday, December 8, 2012

What Is a Roth IRA and Should You Have One?

If you've decided you need to start preparing for retirement, you may have come across several unfamiliar terms. What is a Roth IRA? A Roth IRA is a tax-advantaged investing account similar to a 401k or a traditional IRA. You need to follow special Roth IRA withdrawal rules, but you will benefit from it in the end.

With a Roth IRA, you contribute money to a mutual fund. The contributions you have made have already been taxed as regular income. You can continue to contribute up to a certain amount to an IRA each year, more if you're married. When you reach 59 1/2 and retire, you can withdraw the money. The money you withdraw will be contributions you made in addition to earnings. You don't have to pay taxes on either one. That means all your earnings you get to keep tax free once you withdraw them.

A Roth IRA is a great addition to any retirement portfolio. If you can get a 401K with an employer match, you should max that out first. With a 401K, you do not have to pay taxes on the contributions now. Instead, you pay taxes when you withdraw it during retirement. This means more money get's to earn capital gains and dividends. If you get an employer match, your employer has agreed to add more money to your 401K as long as you contribute. This is free money you should take advantage of before you start contributing to an IRA or other accounts.

The more you invest now, the more you'll have during retirement. That means you can live a more comfortable and exciting retirement. Start saving and investing now and benefit from it later. You will be glad you did when you're able to enjoy your retirement in the years to come. Invest in a Roth IRA and look forward to the tax-free earnings later.

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Start Your Retirement Planning Now

Every working person, after a point of time at the work place, starts thinking about a life of peace and relaxation after their retirement. They plan and dream ahead to have some family time, to travel a bit, to go fishing or even do some of the things they have always wanted to do but never had the time. The people who know the value of these dreams will know the value of retirement planning.

Planning ahead for any event, as a matter of fact is better than meeting it on the way as sudden as it comes. And for an important event such as retirement, much of planning is needed. Financial planning is the most important thing you can do for yourself when you have the means to do so. It is one of those things you owe yourself. Apart from this reason, there are many other reasons why you might need to be ready with a little extra. For example, times of medical emergencies for you or your spouse. In such events as these the main thing that is wanted is money and if you have not saved for it, life may not be easy.

There are plenty of retirement plans out there that you can follow to effect. Retirement plans are offered by government agencies, insurance companies, by your own employers etc. by retirement planning, I mean an account in which you can deposit your savings meant for use exclusively for your post retirement life. These accounts are basically known as IRAs or Individual Retirement Accounts.

IRA is an account you can set up in a bank, an insurance company or any secure financial institution. The aim is to deposit a portion of your income in this account in a regular basis. The money in the account is of course not going to lie there waiting for you to retire. This money is going to be invested on various things such as real estate, stock certificates etc.

You can invest in a number of areas, this choice of course lies in your hands. Investment options are many and whether risky or not, it is ensured that you will get sufficient funds for your retired life. It is advised to invest your money in a safe area so that you don't lost most of your money, but a small profit is assured. When you take up big risky investments, there is always the threat of losing all you have put forth, but if it clicks a huge profit will be the result. The choice of investments, as mentioned above, is in your hands.

When you are looking for a reasonable IRA that you can set up, you should always research it properly. Only if you feel that this is the choice that is most comfortable and effective for you, should you go ahead with the plan. Any retirement plan also requires you to meet a set of conditions for you to access them. So, choose right and make a happy retirement for yourself.

Roth IRA: Education Expenses Can Be Paid From Roth IRA Penalty Free

Many parents struggle with how they are going to save for their kids' college expenses while saving for retirement at the same time. Roth IRAs are very flexible investment vehicles, making them a good choice for parents who are juggling saving for college and retirement.

As always there are some rules to follow when using your Roth IRA to pay for college expenses, so make sure you understand the rules before you take a withdrawal.

Roth contributions can be taken out at any time for any reason. This makes Roths not only a great vehicle to save for retirement, but also to save for college expenses. While I recommend that parents put their retirement goals ahead of college savings goals, it's nice to know that you can withdraw your contributions to be used for college expenses, without worrying about paying taxes or penalties.

If you need more money than you've contributed to your Roth account, you still have options. Normally, distributions taken from a Roth before you reach age 59 ½ are subject to taxes and a 10% penalty (on the earnings only). However, there is an exception for withdrawals that are taken to pay for college expenses.

The early withdrawal penalty is waived if you use the funds to pay for qualified higher education expenses for yourself, your spouse or your dependent children. Qualified higher education expenses include tuition, room and board, fees, books, supplies and equipment. Unfortunately, withdrawals taken to pay back student loans do not qualify (I wish!).

The ability to use your Roth account to pay for college expenses is a huge benefit. However, the withdrawals taken from the Roth could affect your eligibility for financial aid. The good news is that Roth IRAs are not counted as an asset for either the student or the parent in the financial aid formula. The bad news is that withdrawals from the Roth IRA are counted as income in the financial aid formula. So you'll need to weigh the pros and cons before dipping into your retirement accounts for education expenses.

In addition, if you take Roth withdrawals to pay for education expenses, it could disqualify you from other education tax incentives such as the Hope or Lifetime Learning credit.

Please note that while the early withdrawal penalty is waived for withdrawals that are used for education expenses, you will still need to pay taxes on any earnings withdrawn before you reach age 59 ½. This is true regardless of how long the account has been open.

Bottom line, Roths are very flexible investment vehicles, which makes them a great tool for saving for retirement and other financial goals such as education expenses. However, there are rules to follow, and just because you can take a Roth IRA withdrawal to pay for education expenses doesn't mean that's the best option for you. You should consult with a tax professional before taking any withdrawals to determine if that's the best strategy for you.

Simple Rules to Follow for a 401k

Today most employers offer a 401k to their employees. It is one of the easiest and most convenient ways to save for retirement. Most times you just fill in the amount or percentage you want to save in the 401k. Once your determine how much you want to invest, you then pick which mutual funds you want to have your money invested into.

Yes, that is simplistic answer, but saving for retirement does not have to be difficult.

The advantage of a 401k is that most offer an employer match. An employer match is the amount the employer will contribute to your 401k account as long as you do some percentage. An average 401k usually has a 3% match. So if you contribute 3% of your annual paycheck to the 401k, your employer will match that same 3%. It is like receiving a 3% pay raise from your employer. If you don't do anything, you don't receive anything. Now if you do at least 3%, your employer will match that same 3%.

There are some other matching percentages i.e. is that if you do 3% they will match 50% or 1.5% of that amount. The two phrases for a match is a dollar-for-dollar or a percentage match like 25% or 50% of what the employee contributes.

The employer match is one of the great benefits of a 401k. Another benefit is tax-deferred earnings on your investments. In a 401k you do not pay any taxes on the growth of your investments as long as the money stays in the 401k. Once you leave that employer you have several options. One is to rollover the money in the 401k into your own IRA or into another 401k such as one at your new employer. The second option you have is to take distribution or receive a check that you deposit into your bank account. Once you do that you have 60 days to deposit that money into another IRA. If you do not do deposit the money into another IRA the IRS will charge you a 10% penalty plus that amount will be fully taxable.

For example suppose you had $10,000 in your 401k and you decided to have them send you a check so you could pay off some bills. When you file your taxes the IRS treats that money as if you earned an additional $10,000 that year. So depending on your tax bracket that could cost you 30% to 40% or $3,000 to $4,000 of additional taxes. You think that is not very much because you at least eliminated that credit card bill. However, if you were only 35 years old at the time and did not plan to retire until age 65 that $10,000 could have increased in value to $147,300. So that little mistake cost you over $147,000 on one small investment of $10,000.

For many people this is basic knowledge, but many don't realize the same mistakes they make can compound into large mistakes down the road.

Hope you enjoy this information. Until later keep on saving for retirement.

Roth IRA Calculator Spotlights On Upfront Payment To Avoid Future Financial Burden

To set matters straight, IRA is an acronym for an individual retirement account as opposed to another possible meaning of a lesser positive note. Retirement is an inevitable progression upon formal exit from the employment space. Some may consider it another hurdle in the journey of life whereas others treat it as a carte blanche to finally living out life without deadlines and work stress. Whichever schools of thought one is enrolled in, the fact remains that retirement does not equate to bidding farewell to the present and embracing the afterlife. Expenses remain an ever and present element as nails in the coffin are not yet a topic for discussion.

Various types of retirement accounts exist for the everyday tax payer to consider and adopt into his plans. Obviously one needs to open an account to put an end to the rolling stone gathering no moss. Choices between traditional and Roth IRA are up for grabs. Depending on one's present status of income stream, setting up the latter may prove to be a challenge. As its terms and conditions stipulate contributions based on actual earnings, one should rightfully have a source of income via constant employment. This type of account presents the individual with a bill for taxes at point of contribution. Although this seems a disparaging method to encourage savings, it works to the benefit of those who foresee increasing tax rates in the future. Holders of the traditional feel the financial pinch upon withdrawal.

Since the pay-first concept may prove to be a mind-boggling exercise to the dutiful tax payer, various Roth IRA calculators step up to sort out any confusion in the midst. Although some request for more information, all generally require essential parameters such as current and retirement age, IRA balance and amounts of contribution. By punching in the truth as best as possible, cogs turn to calculate current and predicted rates in taxes and inflation. The result is a simple presentment of the supposed balance in one's retirement account upon reaching the checkered flag. Hopefully from that point onwards, the individual is opportune to withdraw a sufficient sum to satisfy all of life's needs with a healthy dash of comfort.

Fancier Roth IRA calculators generate more detailed table of figures and charts from point of commencement to completion of withdrawal. Other than natural causes, unplanned reasons such as health complications may escalate the withdrawal process. As long as one complies with age conditions of the account and withdrawal, no penalty is imposed.