Thursday, September 17, 2009

He Taxes Me, He Taxes Me Not

As the economy continues to lumber along in an upward direction, Americans are throwing open the storm shelter doors. Surveys of retirement plan participants show that investors are trading out of conservative investments and back into stock mutual funds.

For many years, conventional wisdom for investing for long-term wealth building held that you should pile every penny possible in traditional IRAs, 401(k)s, and other tax-deferred accounts. The assumption was that when you stopped working, you’d likely slide into a lower tax bracket. When you withdrew your funds from those investment accounts, you’d pay lower taxes on them. Conventional wisdom doesn’t always hold in unconventional times. Enter the Roth IRA.

The Roth IRA is perfect for spreading out the impact of taxes in your retirement years. With a Roth IRA, you pay your taxes upfront on the dollars you contribute. That means you pay today’s income tax rate. When you withdraw the funds in retirement, they’re completely tax free. Tax FREE!

With the tax cuts from the Bush Administration expiring soon and new taxes on the horizon, the Roth IRA may be exactly what your long-term wealth building plan needs. Many financial advisers are currently recommending a minimum of 30% of a person’s retirement portfolio be held in a Roth IRA.

Since there are tax implications for putting money in a Roth IRA, it’s important to know the rules. This year, the maximum contribution amount for individuals under age 50 is $5,000 (if over 50, you get an additional $1,000). Likewise, there are income limitations on Roth IRAs: individuals making more than $120,000 and married couples making over $176,000 aren’t able to contribute. However, in 2010 anyone will be allowed to convert existing retirement dollars to a Roth IRA without limitations.

When planning long-term investment strategies, always start with the goal of making money. From there you can protect those gains from taxes, and the Roth IRA is a great tool to help in that effort.

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