To invest in an IRA or Roth IRA, that is the question. There are advantages to both kinds of individual retirement accounts, but a Roth IRA may be the smarter move.
“If you are a young professional and have maximized the amount you can put into a 401(k), without question it makes more sense to do a Roth IRA,” says Cheryl Creuzot, president and COO of the Associates in Financial Planning Group in Houston. A Roth IRA will allow you to save money for retirement, accumulate it tax-free and withdraw it tax-free at retirement.
Born out of the Taxpayer Relief Act of 1997, based on legislation written by Sen. William Roth (R-Delaware), the Roth IRA is considered a better tax shelter for retirement savings than its siblings. It allows contributions of up to $2,000 annually, even if you already participate in an employer-sponsored program.
To be eligible, you or your spouse must have compensation or alimony equal to the contribution. Also, in order to make the full $2,000 contribution, your modified adjusted gross income (AGI) can’t exceed $95,000 for single individuals and $150,000 for married couples filing jointly. After that, the amount you can contribute is gradually reduced, then eliminated, once the AGI exceeds $110,000 (single) and $160,000 (married).
You can withdraw contributions tax-free at any time, but generally earnings have to stay in until you’re 591/2 and at least five years have expired. Otherwise, they are taxable and subject to a 10% early-distribution penalty.
For more information, see “Last-Minute Tax Savers,” this issue, or read The Roth IRA Made Simple by Gary R. Trock (Conquest Publishing Inc., $14.95).