As you are aware, a Roth IRA and Roth 401k will have a significant effect on retirement planning over the upcoming year. Those who fall into the Generation X and Y crew will soon realize that their Roth IRA will be a very important part of their investment planning. Basically, it is the best possible planning tool for anyone that is under the age of 50. In 2009, there are some significant changes that have been made in the rules, as well as in the phase-out limits. There are seven changes that everyone with this account, or even those planning to start one, should be aware of.
#1: Free money and then more free money! While a Roth IRA is a great retirement savings tool, a 401k is also a great option. If your company offers any match, take advantage of it. This is like getting free money. After you take the offered match, you can then tend to your account which will later provide you with tax-free money when you make an IRA withdrawal from the account after reaching retirement age.
Savings Account
#2: Consider the benefits of the Roth IRA savings account. The greatest benefit of a this type of account is that you have the option to remove your contributions at any time. This is one of the major differences between a Roth IRA and a traditional IRA or a 401k. In essence, this allows the account to act like a savings account. You will have access to your money in the account. While it sounds simple enough, there are a few things to keep in mind. For one, this rule only applies to your contributions. You cannot remove any earnings or interest. Secondly, if you contribute $5,000 into the account and invest it in a sole stock, you cannot remove that $5,000. The amount will then be based on the actual value of the investment.
2010 Rules
#3: Worried about Roth IRA 2010 rules? Worry about that when it comes. There is no need to get confused about it now. The conversion event in 2010 will allow you to convert your traditional IRA or 401k into a Roth IRA. It will not matter what your AGI or income limit is. Now, this does not mean that you can make a new contribution for 2010. For example, if a couple has an AGI of $225,000, they would be allowed to make the conversion, but they would not be allowed to contribute any new money. If you have an AGI over the acceptable limit to contribute to a Roth and you are looking for something with better benefits of a Roth such as tax free growth and withdrawals with principle guarantees, you need to review the following information Click here.
2009 Contribution Limit
#4: The annual contribution limit for the year has remained the same. This limit is $5,000. If you are over the age of 50, the $1,000 catch-up contribution limit has remained the same. This totals a $6,000 contribution limit for those over 50.
2009 Conversion
#5: It may be the best time to convert your Roth IRA in 2009. If your income limits allow for you to convert, it may be wise to make the conversion to this type of account. Since the market has not bounced back, a conversion might be a wise choice. The only negative aspect of converting is that you will have to deal with the tax bill for the entire year. If you wait until 2010, there are other things you will want to consider. First, the IRS is allowing that tax bill to be spread out over the course of two years. It will not be due until 2012. Second, if there is a recovery in the market in 2009 and any of your investments appreciate, you will have a larger tax bill.
#6: There has been an increase in phase-out limits for the Roth IRA. If you missed the boat to tax-free income last year, the IRS has increased the amount that you are able to earn this year. For those who file their taxes singly, the phase-out range will begin at $105,000 AGI. It is completely phased out when it reaches $120,000. For those who file jointly, the range begins at $166,000 and then phases out at $176,000. Make sure you are aware of these IRA limits.
#7: If you have changed your mind on converting, you can recharacterize. If you have converted to a Roth IRA and later decide you would like to return to a Traditional IRA account, you can recharacterize the IRA.
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Roth IRA 2009 Rules
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