What to Look for
When Choosing a Roth IRA – Compare Traditional IRAs to Roths – How to
Save using Individual Retirement Accounts
April 2nd 2006
Where to put your
A traditional Individual Retirement Account (IRA) is a tax deferred self
funded retirement fund that allows you to contribute a limited yearly
sum toward your retirement. A Roth IRA is also a tax deferred
retirement account, but once you turn 59 and a half and have had the
Roth IRA at least five years, withdrawals are tax-free. Neither IRA is
subject to required minimum distributions after age 70 and a half.
According to Humberto Cruz, a writer for the Tribune News Services, “For
these reasons, many financial advisers recommend that people who have a
traditional IRA and are currently in a low tax bracket consider
converting all or a portion of it to a Roth IRA. To be eligible, your
modified adjusted gross income on any year you convert, not counting the
amount converted or IRA required minimum distributions, cannot exceed
Cruz warns that there are pitfalls concerning converting a traditional
IRA to a Roth IRA. One of his readers made the conversion, only find
out later that he was penalized for not making estimated tax payments.
The rule of thumb is to talk to your tax preparer and financial planner
Saving for retirement can be difficult, especially for people that are
having trouble making ends meet already. Banks and various financial
institutions offer IRA accounts. Even H&R Block has developed a
retirement plan called Express IRA. The company hopes that their
numerous storefront offices will make investing for retirement easier.
Jeff Brown, business columnist for The Philadelphia Inquirer, reports
that in March the New York Attorney General Eliot Spitzer sued the
company for $250 million. Spitzer has accused the company of
"fraudulent marketing" and claimed that 85 percent of the customers paid
Block more in fees than they earned in these low-interest money market
H&R Block has denied any wrongdoing. Brown says that whether the firm
has done anything wrong or not, its Express IRA is a textbook case of
how not to invest for retirement. Brown says you should be aware of
investment advice from someone who is not an investing expert.
Typically, according to Brown, tax preparers are not tax experts.
You should also be skeptical of an advisor who steers you to his firm's
products. Brown says the firm’s bosses may be pressuring him to peddle
the house brand even if competitors' are better.
Another pitfall to look out for is being over conservative. Brown says
that “being overly conservative actually means bearing a lot of risk”.
In the New York case against H&R block, Spitzer’s suit includes
documents that show Block’s IRAs were at times paying only about 1
percent interest, which was consistent with the low yields on bank
savings at the time.
Finally, watch the fees. The New York documents also show clients were
charged a $15 setup fee, a $15 "recontribution" fee each time they put
money in the account and a $10 annual maintenance fee. Brown says “With
a minimum investment of $300, the first year's fees would equal 13
percent of an account -- 13 times the account's interest earnings for
the year. Obviously, an investor would never make money under these
conditions -- annual fees would chew away more of the account every
There are choices out there. The Roth IRAs have become very popular
lately. Although the Roths have no up front tax deduction, the
withdrawals can be tax free. This has less of an effect on lower income
contributors since their tax bills are relatively low to begin with.
Many experts recommend the Roth, as you wouldn't face taxes in
By Dan Wilson
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