Roth IRA: Retirement Planning Essentials

Roth IRA: Retirement Planning Essentials

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Roth IRAs and your retirement.

Considering your retirement needs, are you well situated for your golden years? A lot of us are not, quite frankly. We’ve seen our children through college, paid down our mortgages, but haven’t set aside enough money for our retirement. An Individual Retirement Account (IRA) is one way to provide for your later years. A Roth IRA is one form of an IRA that can help you build wealth and prepare for the future.

Determine your eligibility.

Not everyone is eligible to open a Roth IRA. Such accounts have an income limit. If your adjusted gross annual income is higher than the maximum amount allowed for your tax filing status, then a Roth IRA is not for you.

Figure out your modified adjusted gross income or AGI by visiting IRS.gov and searching for “Roth IRA Contributions.” For 2013, for example, a married couple filing jointly would be qualified to open and contribute to a Roth IRA provided that their adjusted income is under $178,000 per year. In that case they can contribute up to the limit. For couples that make at least $178,000, but less than $188,000, they may contribute a reduced amount. Once their adjusted income is $188,000 per year or more they cannot contribute to a Roth IRA.

The IRS also sets guidelines for other filing statuses: married filing separately, single and head of household. As of 2013, the adjusted income limit for these individuals was $112,000.

Consider your investment.

When you open a Roth IRA, you must determine the type of investment you will buy. You have a number of choices with varying degrees of risk involved. In other words, you risk losing your investment when choosing certain options.

Consider the amount of risk that you are willing to take. If you are younger, such as in your 20s or 30s, you might choose a more aggressive approach. If you are older, such as in your 50s or 60s, you would probably consider a more conservative approach.

Roth IRA investments can be made in a number of areas including: stocks, money market funds, mutual funds and cash investments. If you are not certain what approach to take, speak with a financial advisor. Ultimately, the decision rests with you.

Brokerage, bank or other financial institution.

Brokerages are not the only place where you can open a Roth IRA. Banks and other types of financial institutions also handle these and other investment accounts. It would be a good idea to explore your options before making a choice.

There are several considerations that should be weighed.

First, what type of account fees are charged? Brokers may charge an annual fee, while mutual funds typically require payment of management fees. You need to understand the fee structure, if any, before making a purchase.

Second, how much must you contribute to open an account? Not all Roth IRA providers require a minimum deposit, but brokers typically require at least $500, sometimes much more. You should also know that you are restricted by the amount you may contribute in any given year. In 2014 that amount is $5,500 or $6,500 for people who are 50 or over.

Third, what types of investment choices are available? If your broker or banker has few investment choices, then you may want to look elsewhere. His fees may be low, but your options may be few.

Fourth, how can you access information? It used to be that a prospectus, account reports and other information was mailed to customers. These days, you should be able to find what you need online. Moreover, the information provided should be current. Your Roth IRA provider should also offer online tools for you to make investment choices and decisions.

Fifth, where is the broker, banker or other advisor located? Sure, you can open a Roth IRA online and have it maintained remotely. Even so, some people prefer to meet with their broker face to face. Can you do that? If so, where is he or she located?

Apply for a Roth IRA

Once you know where you will open a Roth IRA and what investment choices you will make, then go ahead and open you account. If you are opening your account online, then do so immediately. Otherwise, make an appointment to open a Roth IRA in person.

When opening your account there is certain information that you will need to provide. That information includes: your Social Security Number (SSN), the name and SSN of your beneficiary, financial account information such as your checking account, and salary information.

Roth IRA Considerations

If you are not sure that a Roth IRA is right for you, consult with your financial advisor, a bookkeeper or with your tax planner. You should know that Roth IRAs do not provide a tax break for your contributions. Instead, your earnings and withdrawals are generally tax-free.

See Also Retirement Planning: What is Involved

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