Why You Need a Roth IRA

“With this indispensable savings tool, your money grows tax-free, you can invest in almost anything, and you get several cool perks.”
-The Kiplinger Report

A Roth IRA very well may be the most versatile investment tool available for young adults. While the relatively low income limits on a Roth IRA mean that you won’t be able to use them forever, the flexibility they offer make them the perfect tool to begin your investment career.

First, let’s go over the rules for utilizing a Roth IRA. Only earned income is eligible for deposit in a Roth IRA, meaning that any money not earned through a paying job cannot be deposited into a Roth IRA. Single filers making less than $105,000 per year and joint filers making less than $166,000 per year can contribute up to $5,000 per year into a Roth IRA. If you are single and you make more than $105,000 per year or if you file jointly and have a combined income of more than $166,000 then your contribution will be limited. At an income level of $120,000 for singles and $176,000 for couples, you can no longer contribute to a Roth IRA. If you already have a Roth and reach those limits, you do not have to cash the account out; you simply cannot contribute to the account any longer.

Roth IRA’s offer enormous tax advantages as well. Any funds deposited into a Roth IRA are completely tax free if you wait until retirement to remove the money. If you do remove your money before retirement, you can withdraw any contributions tax free without penalty. However, if you withdraw any of the earnings from the account before retirement, they will be subject to taxing as well as a 10% early withdrawal fee. In addition to the tax advantages of a Roth IRA, account holders can use their contributions for things like purchasing their first home or saving for their children’s college tuition tax free. In addition, the Roth IRA will function as an emergency fund in a pinch since contributions can be withdrawn tax free at any time as long as any earnings on the account are left in.

Beginning in 2008, the IRS will allow Roth account holders to withdraw up to $10,000 including earnings, tax and penalty free, for the purchase of a first home. To qualify for this tax break, the account must be open for at least five years, meaning if you open an account for 2009, you could use your contributions and earnings towards the purchase of your first home as early as January 2014. The $10,000 limit is per person, so a couple could withdraw up to $20,000.

You can also use a Roth IRA to save for your children’s college if your income level does not allow for contributions to both a retirement fund and a college savings fund. In addition to being able to withdraw contributions at any time tax and penalty free, you can withdraw your earnings penalty free if you use the money for college tuition. You’ll still have to pay taxes on any earnings you use for college tuition, but you can avoid the 10% early-withdrawal penalty.
Any way you cut it, a Roth IRA is an incredibly versatile savings and investment tool. From saving for college to buying your first house, a Roth IRA will allow you to save your money, tax free, while still having access to your contributions at any time, penalty free.



Source

http://www.kiplinger.com/columns/starting/archive/2006/st0309.htm

http://www.irs.gov