Start a Roth IRA Savings Account for Retirement

January 25th, 2006

Start a Roth IRA savings account for Retirement

Interest Savings add up

A Roth IRA is a retirement savings account that you pay taxes on the money before you put it in the savings account. When you are ready to take out the money at retirement (starting at age 59 ½) all the money is tax free, including the interest earned money.

A teenager would benefit from starting a Roth IRA when they start working because they can invest up to $4,000 each year in an Individual Retirement Account (IRA). If you pay taxes first it means that all the interest acquired during all the years are tax free. This could save the teenager a large sum of money in taxes when they retire. If you child was able to put away $4,000 each year for the next 4 years it could, at an 8 percent interest rate, equal $750,000 at age 65. Turning just $16,000 into $750,000 is a great way resolve a retirement plan early on. Many people wait until later in life to start and would not ever see this kind of return on investment.

You can start an IRA for a child at any age and you can pay for chores he does around the house and put these funds in the account. This will train your child the value of saving money instead of the art of spending it.

The Roth IRA is generally better for most people. However each person needs to weigh out if paying taxes and missing out on a tax deduction is hurting them too much. The longer you plan on saving the money the better the Roth IRA is for you.

You can set up your own individual Roth IRA or you can get one set up through your employer. There is a maximum amount currently set at $4,000 per year. With a total deposited amount for an individual not to exceed $95,000 and a married couple not to exceed $150,000.

The more money you make the less you are able to contribute to a Roth IRA. The Roth IRA amounts you can contribute gradually reduce until you reach a gross income of $110,000 (single) or $160,000 (married filing jointly). At this point you are no longer able to deposit funds in the account for that year.

Each tax year can create different amounts of money that are allowed for deposits along with caps for income. So it is important to be aware of these amounts. If you work with a tax or financial planner they will know what these amounts are going to be. If you are a do-it-yourself financial person, you can check that tax laws at the IRS website each year.

The Roth IRA is a good way to start a savings for retirement, but you can also have other retirement funds set aside. Tax-free interest earned income is the most attractive feature of the Roth IRA.