NFIB

It's the End of the Year -- Have You Started a Roth IRA?
04/ 09/ 2002


During a recent conversation I had with a CPA, he commented, "Most things that seem to be too good to be true probably are. The only exception is a Roth IRA." In today's Workshop, writer Jeff Moses discusses why everyone, whether or not they are self-employed, should consider starting a Roth IRA.

Consult with your accountant to determine if you're eligible for a Roth IRA. In general, most people making less than about $140,000 per year are eligible to start a Roth, with total payments into the Roth of up to $2,000 per year per person possible. Normally, husband and wife can each make up to $2,000payments per year, depending on total income. However, there are so many variables and guidelines that you should check to make sure that you are eligible, and to determine how much you can pay into a Roth. In most cases, an individual cannot make $2,000 payments to both a Roth IRA and a regular IRA.

A Roth IRA offers several unbeatable advantages over a regular IRA.

Although initial payments to a Roth are not deductible for tax purposes, you will NOT have to pay any federal taxes on withdrawals from your Roth, no matter how much the initial amount has grown -- in contrast to withdrawals from regular IRA's, which are determined as regular non-business income for tax purposes; at the time of withdrawal you do not have to begin taking deductions at any specific time with a Roth, in contrast to regular IRA's and SEP IRA's which have specific withdrawal schedules based on normal age expectancies (usually beginning at age 70 1/2).

Roth IRA's offer a tremendous boon to people saving for retirement. If you put $2,000 in a Roth this year, for instance, and during the next 30 years it grows to $20,000, you can withdraw the full amount at any time over age 501/2 -- without having to pay a penny of federal tax on any amount withdrawn.

Have you set up your Roth IRA yet? You have until April 15, 2000 to make payments for calendar year 1999. However, the earlier you make payments to your Roth (or to any IRA), the more chance your money has to grow tax-free. It's been shown that individuals who invest in their IRA's at the beginning of each year will earn substantially more over their working careers than individuals who invest in their IRA's at the last minute each year.

Although most people cannot make full $2,000 payments to both a Roth and regular IRA, it may be possible to make additional payments to a SEP-IRA(Simplified Employee Pension IRA), depending on income status. These payments could then, potentially, be transferred to a Conversion Roth IRA so that you can build up your total Roth savings as quickly as possible. Consult with your tax adviser for details about SEP-IRA's.

You can transfer existing regular IRA and SEP-IRA savings into special "Conversion" Roth IRA's. Partial conversions are allowed. You will have to declare the transferred amount on your taxes for the calendar year, but it maybe worth it in the long run because of savings on federal taxes at the time of withdrawal from your Roth IRA. Consult with your accountant to determine if the current tax liability of such a transfer will potentially be offset by possible tax savings at time of withdrawal.

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