So Many Shoes, So Little Money – Blog

New Roth IRA Rules

October 19th, 2009

An important tax law change is coming that expands eligibility for a popular retirement account choice, the Roth IRA. Beginning January 1, 2010, Roth IRA conversion income limits will be eliminated, allowing anyone to convert a Traditional IRA or old 401(k) to a Roth IRA. Question is, should you? You’ll need to talk to an expert to have them assess your individual situation but you should certainly look into it.

There are at least five different kinds of IRAs each with its own rules and regulations.  I included information about Education IRAs but they are rare. Two of them must be funded by your employer so I have excluded them.

You need to check them all out, preferably with some expert help, like a CPA or an attorney, family member or other expert before investing in any of them.

Traditional IRA

You are allowed to contribute up to 2,000 dollars per year into a traditional IRA. The amount of the contribution that is deductible on your income tax return depends on your Adjusted Gross Income (AGI) which can be found on your income tax form and whether you are covered under an employer’s plan. So, depending on your filing status (Single, Joint, etc), and your AGI, your contributions may range from fully deductible to totally non-deductible. Even though you are eligible to contribute to your IRA, you may be in a position where none of these contributions are in fact deductible.

Roth IRA

You can also put money into a Roth IRA. Roth IRAs have lots of rules, but if you follow them, any money you put into one is taxed at that time and even if it grows, you won’t have to pay any more taxes on it. For example, if your account doubled in value over the years, even when you cash out at retirement, you’d get half the money tax-free. Also you cannot withdraw your funds within the first 5 years after the establishment of the Roth without a penalty.

Education IRA

You can put away up to $500 per year into an education IRA, the money grows tax-free and receives a preferred tax treatment when the money is used for educational expenses. These plans are not very common in that they are very restrictive on who can make contributions to them, the amount of total contributions allowable each year, and the limitations on what exact education expenses qualify.

Just like you need lots of different shoes, you have quite a few different ways to invest your money. None of these options are mutually exclusive. You can have a brokerage account and a 401K. Or you could have a 401K with your current employer and an IRA which includes money from previous 401Ks.

Filed under: Investing

Tags: saving