Why You Need a Roth IRA

Individual Retirement Accounts (IRAs) were created in 1974, a boon to folks who either were not fortunate enough to participate in a company retirement plan and to others who just needed an impetus to begin saving for retirement. They were an almost immediate success. And by the end of 2005, according to the Investment Company Institute (ICI), IRA assets across the country totaled more than $3.3 trillion dollars.

And in today's world, with pensions few and far between, the need to personally save for retirement is more important than ever, propelling the growth of IRAs even faster and further!

In 1998, Congress added a new twist, when legislation authorized the creation of the Roth IRA. By the end of 2005, also according to the ICI, Americans held some $145 billion in Roth IRA assets.

Roth contribution limits are the same as traditional IRAs, but are reduced by any contributions you make to traditional IRAs. Here is the current schedule for contributions for both types of IRAs:

2007   ­                   $4,000­

2008­                      $5,000­

2009 (and after)       $5,000

After 2008, the limit will be adjusted for inflation in $500 increments. In addition to these contribution limits, workers age 50 and older (as of the end of the year) will be able to make "catch-up" annual contributions of $1,000 per year.

Roth IRAs provide certain advantages beyond traditional IRAs:

   1. The Roth IRA is funded with after-tax dollars, rather than pre-tax dollars. But as a result, you owe no taxes on your withdrawals (including earnings), as long as the withdrawals are qualified (primarily meaning after age 59 ½, and if you have owned the IRA for at least 5 years). So while you forfeit any tax advantages in the current year, you should more than make up for it by avoiding taxes on your principal and earnings when you withdraw them.

   2. Certain additional withdrawals from a Roth IRA (even before age 59 ½) may also be tax- and penalty-free. These include the first-time purchase of a home, disability, unreimbursed medical expenses more than 7.5% of your adjusted gross income, qualified higher education expenses, and a few others. These exceptions make the Roth IRA an attractive investment vehicle for many other uses, in addition to retirement and savings.

   3. The annual income levels for full contributions are much higher for a Roth IRA than in a traditional IRA. Individuals making less than $114,000 and married taxpayers filing jointly who make less than $166,000, can make at least a partial contribution to a Roth for the 2007 tax year. For a full contribution, the income limits are $99,000 and $156,000, for single and married taxpayers filing jointly, respectively.

   4. The Roth IRA - unlike a traditional IRA - doesn't require minimum withdrawals when you reach age 70-1/2.

Some higher-earning investors will ignore the Roth IRA, since its contributions may not be deductible, but that would be a BIG mistake! Here's why:

   1. Your money compounds over time, and the sooner you begin contributing, the more money you will accumulate during your working lifetime - which makes the next advantage even more important...
   2. Unlike most retirement vehicles, as long as your Roth IRA distributions are qualified, your earnings and deductible contributions are tax- and penalty-free. That can add up to a significant savings - the icing on your retirement cake!

The long and short of it is this: contributing to an IRA - if started early enough - is a relatively painless way to help ensure a golden retirement. But even if you begin later in life, the Roth IRA will still substantially boost your bottom line. You can accumulate a significant sum of money in a Roth IRA and if you don't need it, you don't have to withdraw it at age 70 ½. You can just leave it for your heirs.

If you pass the income test, I strongly encourage you to consider starting your Roth IRA today. And if you would like further information, here are a couple of web sites that can help you out:

http://www.fairmark.com/rothira/

http://www.irs.gov/faqs/faq17-3.html

Happy Investing.

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