Saturday, February 28, 2009

Are you taking advantage of a Roth IRA? - By Dan Kalm - The Observer's official State Farm Agent

TUCSON (Observer Update) - Simply put...contributing to a Roth Individual Retirement Account (IRA) may be a smart money move. The question then is...are you taking full advantage?

The benefit of contributing to the Roth IRA is the money you put into one of these accounts grows tax free and distributions may be made tax free.1

If you haven't opened a Roth IRA, do it now. You have until your tax deadline (typically April 15) to set up an account and make contributions for the previous year. Annual contributions are limited; currently the maximum amount is $5,000.2 That means you can invest $5,000 for 2009, giving you a solid start to your savings.

If you're just starting to invest, the Roth IRA should be one of your first options – even before you open a regular, taxable account or contribute to a workplace retirement savings plan. The only exception is if your employer offers a match on your 401(k) contributions. That's free money you don't want to pass up. You can invest in both a Roth IRA and a workplace retirement plan.

Not sure where to find money to fund your account? Consider investing your tax refund. About 70% of Americans will get a refund this year, and last year the average refund check totaled more than $2,000. That amount would be a great start to a new Roth IRA.

There are specific income restrictions for contributing to a Roth IRA. Contributions are limited and based on the taxpayer's filing status and Modified Adjusted Gross Income (MAGI). When the taxpayer's income exceeds the eligibility limits for contributing to a Roth IRA, an eligibility phase out period begins.

For 2009, the MAGI phase out range for contributing to a Roth IRA is:

More than $166,000 but less than $176,000 for a married couple filing a joint return or a qualified widow(er), or

More than $105,000 but less than $120,000 for a single individual or head of household, or

Less than $10,000 for a married individual filing a separate return.

Your exact contribution amount can be calculated using the worksheets found in Publication 590 on the IRS Web site at

Withdrawals are tax-free if you're over age 59½ and at least five years have expired since you established a Roth IRA. Otherwise withdrawals of gain may be taxable (unless the withdrawal is “qualified”) and may be subject to a 10% tax penalty.

2. An individual can contribute up to $5,000 (or 100% of earned income, whichever is less) for tax year 2009.If you are over age 50, you are allowed to make additional catch-up contributions of $1,000 for tax years 2008 and 2009. Your adjusted gross income may limit your contribution amount.

(For more information, go to Dan Kalm's website or E-mail him.)

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