Roth Ira

My column today focused on a poll by Baltimore'sT. Rowe Price that found younger investors less inclined to invest in an individual retirement account this year. If anyone can benefit from a tax-sheltered IRA, it's younger investors who have the time to see their earnings compound over time.. But if younger investors need another reason to invest in a Roth IRA, here it is: $133,063. That's how much in taxes you can avoid on your nest egg by going with the Roth. There are two types of IRAs: A traditional IRA that allows investors within certain income limits to deduct their contributions on their tax return.

My column today focused on a poll by Baltimore'sT. Rowe Price that found younger investors less inclined to invest in an individual retirement account this year. If anyone can benefit from a tax-sheltered IRA, it's younger investors who have the time to see their earnings compound over time.. But if younger investors need another reason to invest in a Roth IRA, here it is: $133,063. That's how much in taxes you can avoid on your nest egg by going with the Roth. There are two types of IRAs: A traditional IRA that allows investors within certain income limits to deduct their contributions on their tax return.

Among the multitude of ideas that readers have submitted for building an emergency fund, here's an intriguing one: Use a portion of your Roth individual retirement account. Although I have misgivings about it, the concept is worth a look. "My wife and I have an emergency fund equal to three-fifths my annual salary," said Robert Jones, a reader from Pennsylvania. "We keep it in a bond mutual fund as part of our regular brokerage account. We also have Roth IRAs with the same broker. "Might we be better off keeping that emergency fund as part of our Roth IRAs?

The buzz in the financial industry right now: Roth IRA conversions. Starting this year, there is no longer an income cap to convert a traditional individual retirement account or 401(k) into the tax-friendly Roth. Essentially, everyone now has access to a Roth. Congress did this to generate tax revenue. Contributions to a traditional IRA and 401(k) are often made with dollars that haven't been taxed yet. When you convert one of those accounts to a Roth, you must pay regular income tax on the amount being converted.

HAVE you set up a Roth IRA yet? If you haven't, it can't be for lack of marketing effort by the financial services industry. Since Jan. 1, when the new tax-free savings accounts became available, every other piece of junk mail at my house has been a Roth IRA come-on. The personal-finance magazines are filled with articles about this "revolutionary" way to save.Permit me to rain a little skepticism on the revolution. I have no idea whether the Roth IRA is the appropriate savings vehicle for you and your family -- as they say in Money magazine.

SUGGESTIONS to increase your money:"Most people know the Roth IRA is a great retirement tool, but it's even more valuable for estate planning," says Worth magazine. "Roth assets are included in your estate but, unlike the beneficiary of a regular IRA, a Roth beneficiary avoids income taxes after estate taxes are paid. The Roth creates a powerful method of moving assets from one generation to another.""If inflation worries you, buy Treasury inflation-indexed bonds," says Kiplinger Finance Adviser.

HOW CAN you profit in such a volatile market?"Look at the plus side," says Tax Hotline. "A down market presents a unique opportunity to make stock gifts to reduce your estate tax. Your $10,000-per-recipient annual gift exclusion stretches farther when you use stocks down in value."The newsletter adds, "This is an ideal time to convert your regular IRA into a Roth IRA. Because the market is down, you'll have less income tax to pay on the conversion."And when many investors are suffering paper losses, remember that you can save taxes by offsetting capital gains with losses.

SO NOW you have three Individual Retirement Accounts to choose from. Or at least you will have, starting next year. Which one looks best? In almost all cases, the new Roth IRA wins the day.In case you're wondering, it's named for Sen. William V. Roth Jr. of Delaware -- by odd coincidence, the chairman of the Senate Finance Committee.Whether to sign up for this IRA is a no-brainer. If you qualify, just say yes. You put away up to $2,000 annually after tax ($4,000 per couple), hold for five years, then never pay a nickel of federal tax on the money you earn -- if it's spent on your first house or after you reach 59 1/2 . It's also free when used if you're disabled or die.What if you unexpectedly need money for some other purpose?

Friends who are 70 1/2 are receiving their minimum distribution and investing each year in a Roth IRA even though they don't have any earned income. Can I do this? -- Patricia Kunkel, Cleveland You need earned income to contribute to a Roth individual retirement account, but your friends may be doing something a little different, said Julie Schatz, a financial planner with Investor's Capital Management Inc. in Menlo Park, Calif. They may be withdrawing funds from a 401(k) or traditional IRA to satisfy their required minimum distributions and paying the tax on that money, then withdrawing even more from their accounts, paying the owed income tax and converting that additional money to a Roth account, which is legal, she said.

I am 61 years old and have about $500 a month to use either in funding my Roth IRA or paying down my mortgage. Currently, my mortgage is for 15 years at 5.81 percent. I plan on retiring in June 2009. Which should I do? Hands down, fund your Roth IRA. Here's why: The interest rate on your loan is so cheap, so it isn't costing much to borrow the cash. You already have a 15-year mortgage, and while you haven't told me how soon you will pay off this loan, you're already paying down the principal pretty quickly.

The buzz in the financial industry right now: Roth IRA conversions. Starting this year, there is no longer an income cap to convert a traditional individual retirement account or 401(k) into the tax-friendly Roth. Essentially, everyone now has access to a Roth. Congress did this to generate tax revenue. Contributions to a traditional IRA and 401(k) are often made with dollars that haven't been taxed yet. When you convert one of those accounts to a Roth, you must pay regular income tax on the amount being converted.

Higher-income taxpayers for years have been shut out of the Roth individual retirement account and could only look on with envy. But that's about to change. Next year, everyone will have access - albeit, indirectly for some - to this tax-friendly account. The government next year will eliminate an income cap for those who want to convert a traditional IRA, a 401(k) or other retirement account into a Roth. So, basically, anyone with one of these accounts can open a Roth. And in Maryland, the wealthiest state, this change in the tax law could be a boon for many.

Joe Cunningham is convinced that income taxes are going up, even for middle-class taxpayers like him. Attempts to fix the economy can't work without an enormous tax increase, the Pasadena retiree says: "It will be on everybody who pays taxes, which ultimately always is the working class or retired working class." For that reason, the 68-year-old wants to convert his traditional individual retirement account to a Roth IRA. By doing so, he'll have to pay regular income tax now on the funds he transfers to the Roth.

I am 61 years old and have about $500 a month to use either in funding my Roth IRA or paying down my mortgage. Currently, my mortgage is for 15 years at 5.81 percent. I plan on retiring in June 2009. Which should I do? Hands down, fund your Roth IRA. Here's why: The interest rate on your loan is so cheap, so it isn't costing much to borrow the cash. You already have a 15-year mortgage, and while you haven't told me how soon you will pay off this loan, you're already paying down the principal pretty quickly.

My wife and I recently retired on small government pensions and have moderate Social Security benefits from nongovernmental employment work history. We both have untapped 403(b) annuities and have heard that we should convert them to IRAs, then gradually convert the IRAs into Roth IRAs. What are the tax effects of such a conversion, and what is the optimum way for us to do this? - J.P. Because your other sources of income are fixed pensions, you are right to consider getting rid of the annuity to diversify the types of investments in your portfolio, said Mark Balasa, a financial adviser with Balasa, Dinverno & Foltz LLC in Itasca, Ill. "Unless they are in the rare 403(b)

Hard economic times can call for cold, hard cash. Whether financial pressure comes from rising gasoline and grocery bills, from a period without steady income or from a mortgage burden, emergency dollars are a necessity. Ideally, people have established liquid emergency funds. In addition, spending needs to be reduced in difficult times. Beyond that, strategic decisions must be made on where to go next for money. Credit cards are a terrible source for emergency dollars because they worsen the financial situation through high interest rates and mounting debt.

My wife and I are thinking about opening a Roth IRA - individual retirement account - for our 16-year-old son. I've paid attention, as you have suggested that small savings early in life can turn into million-dollar nest eggs. Is there any reason why we shouldn't open a Roth IRA for our son? - M.H., Allentown, Pa. If you were considering giving your son a Roth IRA as a college graduation gift, it would be a no-brainer. I'd applaud your decision, maybe even nominate you for a "Parent of the Year" award, for providing your son a tremendous head start on his financial future.

An astute reader uncovered a basic mathematical truth that seems to elude many die-hard Roth individual retirement account supporters: "I've been reading people who sing the praises of Roth IRAs and how they can earn more than traditional IRAs," the reader wrote. "I didn't see how this could be true, so I sat down with a computer spreadsheet program. I put a hypothetical $2,000 into a traditional IRA and figured a 5 percent return per year for 15 years. "After 15 years, I deducted the ordinary income tax (at my 15 percent bracket)

The tax rebate checks sent Americans' after-tax incomes up by the biggest monthly amount in more than three decades, the Commerce Department said recently. And now we know how at least some of the dough was spent. Some excerpts from howispentmystimulus.com: "We spent our check on car repair. Don't you know the engine failed the week before our check came. So we stimulated a mechanic shop (which is fine). Our original plan was to finish paying off the car that we repaired. ... Still working on that."