Yes, I am referring to you.
My favorite retirement savings vehicle is the Roth IRA and you may be wise to use it.
There are 3 ways to fund a Roth IRA.
1. FRONT-DOOR Roth Contribution – Contribute directly if – Married family income under $173,000 (phased out to $183,000)
A Roth IRA is funded with after-tax money and there is no income tax deduction for the contribution.
The best feature of this wrapper is that once the money is there, it is not taxed again!
- No tax to pay on reinvested dividends, interest or capital gains.
- No tax to pay when you withdraw the money after age 59 1/2 *
- Unlike other IRA’s, investors are not forced to withdraw money after age 70 1/2
- Whatever you do not spend passes income tax-free to your account beneficiaries.
2. BACK-DOOR CONTRIBUTION – Contribute to a Non-Qualified IRA and then immediately convert it to a Roth (if you earn too much money to qualify for a FRONT-DOOR Roth IRA).
There are no income restrictions on a non-qualified IRA so anybody can contribute up to $5,000 or $6,000 (if over age of 50) of their earnings to this account each year. The next step is to convert the account to a Roth IRA. If you do it right away, there should be very little if any taxable gain in the account you are rolling over.
* WHAT IF YOU NEED MONEY PRIOR TO AGE 59 1/2:
If you need money prior to age 59 ½ you can get a penalty free withdraw if the money is needed to:
- Pay medical expenses.
- Cover the down payment or avoid eviction or foreclosure on your principal residence.
- Pay college tuition.
- Cover funeral expenses for a family member. Roth Rules
The bottom line is that this allows couples to invest $10k per year ($12k if over age 50) into an account and never pay income on that money again. In light of where income tax rates are headed, I can’t imagine a better place to put your money.
Contribution Deadline = Tax filing day in April for the prior year. This means you have until April 15, 2013 to make your contribution for your 2012 income tax return.
This money can be invested in any marketable security or mutual fund.
3. Convert existing IRA accounts that have never been taxed to a Roth IRA.
You have to count the amount converted as ordinary income, but you would never have to pay tax on the money again and it would also ass tax-free to the beneficiaries. Check with tax adviser before making conversion.
The federal government is bankrupt and part of their solution is to confiscate more of our money via taxes. I suggest you consider this investment wrapper to help you keep more of your hard-earned investment capital.