You Can Lead a Horse to Water.....

4/14/2009 10:01:00 PM / Posted by Soullfire /

.....but you can't make them drink.

This is referring to the Roth IRA. It's an awesome investment vehicle that not many really know all the details about. For the occasions that I do take the time out to explain how it works to people, I'm surprised by the number of folks who can afford to put some money in a Roth but choose not to do it.

The Roth basically works in reverse of a traditional IRA or a 401K if you have one. With traditional IRA's and 401K's, the money you contribute is tax deductible so it reduces your reportable income for that year. When you hit retirement age and start taking money out, you will then start paying taxes on that amount. With a Roth, you fund it with after-tax money, so you get no deductions, but all the money and interest/profit you earn will be forever tax free.

The cool part about a Roth account is that you have access to the money you put in at any time without penalty. If you decided you need the money now, you can take out what you put into the Roth with no restrictions. Not so with a traditional IRA or 401K. With those, you are committed to keeping it in the account until you reach retirement age. If you take any money out before then you are hit with big penalties that make it very undesirable to do so. So there's no risk of committing money you might need soon when putting it in a Roth account.

Most banks and brokerages have them and it takes just minutes to open. The deadline for opening/funding a Roth for the 2008 tax year is by April 15, 2009 via electronic funding or sent via snail mail and postmarked by that date.

To qualify to contribute to a Roth, it has to be from earned income, not savings- which means you have to have a job. There are also income restrictions such that if you have a six figure salary, you may not qualify. For those who do qualify, it's a great investment and shouldn't be passed up. Even if the contribution that can be afforded is small, it's better than nothing.

More info:

Link 1

Link 2


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