Things To Look For Before Opening an IRA Account

Many brokerages and financial institutions offer IRAs.  This includes brokerages such as Edwards Jones and Merrill Lynch, banks, online discount brokerages like TradeKing, E-Trade and Scottrade, and mutual fund companies such as T. Rowe Price, Fidelity and Vanguard, as well as certified financial planners.  What you will want to do is identify the financial institution for opening your IRA account that meets your individual investment needs the best.

If you would like to be able to have face-to-face interactions you may want to open your account with a full service brokerage that has a local office.  That way you can discuss face-to-face your individual investment needs.  On the other hand if you are a person who prefers an investment approach that is more hands-on, you may want to open your account with a mutual fund firm.  This allows you to invest in a wide array of mutual funds as well as other types of investments.  You may also want to consider opening an account with one of the online brokerages.  This will allow you to make low cost individual stock trades.  Or if you would like a combination of features, a company such as Scottrade is one you might want to consider.  They offer discount online brokerage and have individual local branches as well where you are able to meet with brokers face-to-face for discussing your investment goals and needs.

Before you open an IRA account, here are some questions you should ask first:

• Do you have minimum contributions?
• Do you have minimum initial investment amounts for opening an IRA account?
• What kinds of fees do you charge and what are the amounts?
• Do you offer automatic contribution options?
• Are any of your fees waived if you receive electronic statements or maintain a minimum account balance
• Which types of investment options do you offer?  Mutual funds, bonds, stocks, CDs, ETFs, Other?

Most of the answers to these questions you can probably obtain online, with the exception of an IRA account opened with a financial planner.  They may not have the information available online.  If you can’t find the information online, call the financial institution.  Before you open an IRA account, ask them to send you an information packet.  Make sure to review fees and all other details before you open an IRA account to ensure you understand their free structure and any other expenses you might have to pay.

In most cases, you should go with the broker or company that you feel the most comfortable with.  If later you aren’t happy with the financial institution that your IRA account is with, you will be able to transfer your IRA to another financial institution.  Brokers will be happy assisting you with the paperwork.

Opening a Roth IRA
The first thing you need to do is examine what your investment needs are. There are many financial institutions available for acting as your IRA custodian. They can be divided into three major categories: brokerage firms, mutual fund companies and banks.

Usually banks offer only money market accounts, CDs and other similar type investments. There may be other investment options offered by some banks, but there are often higher expense ratios and commissions with banks than there are with brokerage firms and mutual fund companies. Unless a bank is offering full service brokerage at a reasonable cost, you will probably be better off going with a discount brokerage or mutual fund company.

Brokerage Firms vs Mutual Fund Companies
Big brokerage firms and mutual fund companies are usually the best option for most people, due to the fact that they have low commissions, low expense ratios and offer a wide array of different types of investments. For investors who are more experienced or at heart are day traders, a better option may be discount brokerage firms.

Best Roth IRA Discount Brokerages
If you are interested in investing in individual stocks, a primary concern of yours will be transaction costs. The discount brokerages listed below all offer stock trades with low costs to help meet the needs of most investors. Each of the discount brokerages that follow offer unique features. You will need to compare them to find the best option for your individual situation. All of the IRA offered by these brokerages come without minimum balances or associated custodial fees.

Scotttrade
Scotttrade is a highly respected discount broker firm. It offers local branches, which is a feature that other major discount brokerages don’t offer. This option is great for those looking to have a personal touch.

Scotttrade’s Roth IRA Account includes the following features:

$7 stock trades
local branches
no minimum balances or custodial fees on their Roth IRA accounts

E-Trade
E-Trade, for three years in in a row (2007-2009), was ranked as Smart Money Magazine’s No. 1 Online Broker. E-Trade offers full service brokerage and is also a full fledged bank that offers top rate savings and checking accounts. If you prefer doing all or most of your banking in one place, it makes E-Trade’s Roth IRA a very attractive option.

The Roth IRA E-Trade account features:

$9.95 stock trades
full feature bank
Roth IRA accounts with no minimum balance and with electronic statements there are no custodial fees

Bonus Offer: For new customers opening a Roth IRA E-Trade is offering 100 stock trades fee.

Zecco
A couple years ago Zecco burst onto the scene of discount brokerages by offering all members free stock trades. Eventually the free trades became more limited. Now you can make 10 trades a month that are free if your balance is $25,000 or over or you make at least 25 trades a month. However ETF and stock trades are just $4.50 each. That is a lower rate than is offered my many of the other discount brokerages. The Roth IRA Zecco account features:

Roth IRA accounts with no minimum balance or custodial fees
$4.50 stock trades

TradeKing
TradeKing has received the best ratings for customer service and best discount broker overall. They offer free trading tools, $4.95 trades, free Maxit Tax Manager access, a learning center, and community for investors to share information and tips. They also offer a reimbursement of $150 when transferring assets from another brokerage to TradeKing. The Roth IRA TradeKing account features:

Roth IRA accounts with no minimum balances and no custodial fees
$4.95 stock trades

ShareBuilder
Inexpensive $4 or less trades are offered by ShareBuilder on automatic stock trades and their real time trades are only $9.95. ING Direct owns ShareBuilder, making it easy to link your brokerage account with your savings account. This feature is great for quickly transferring money for a trade. The Roth IRA ShareBuilder account features:

$4 (or less) automatic trades
Linking ShareBuilder accounts with ING Direct accounts
Free automatic DRIPS
On Roth IRA accounts, no minimum balance or custodial fees

Individual investor needs are all different. However, the options above are great places to start looking for somewhere to open an IRA account.

Best IRA Mutual Fund companies
For most investors, mutual funds and index funds are usually the best investment options, particularly for new investors. Make sure you carefully examine fund expense and commission ratios, the quality and variety of investment options, minimum required investment accessibility to funds, low balance fees, annual management fees and other types of fees. You will want to avoid or pay as few of these fees as possible.

Vanguard
This mutual fund company is a nonprofit and passes their savings to their customers. They have some of the industry’s lowest expense ratios and offer a wide array of mutual funds with top ratings. In terms of low expense ratios, Vanguard’s index fund selections are very competitive. Many long term customers have great things to say regarding their investment options and customer service.

With electronic statements there are no account fees
For Vanguard funds commissions are free, although early redemption fees could apply. For outside funds, commissions vary
Minimum investment requirements on most funds is $3,000, with $1,000 being the lowest

Fidelity
A wide array of low cost index fund and mutual fund options are offered by Fidelity. Trading funds that are owned by Fidelity is free, although if you sell them too quickly there could be early redemption fees. For opening an IRA there is a $2,500 minimum investment requirement. However all fees are waived with $200 automatic monthly investments. One downside to a Fidelity Roth IRA is the $10,000 minimum investment requirement for their index funds, which makes it hard to invest in index funds using a Fidelity IRA account. However, an IRA account could be opened by investing in their low cost mutual fund selections and then transferring assets later to an index fund once you have amassed $10,000.

Commissions: no sales charges, no-load mutual funds, no commissions for Fidelity Funds. For outside funds, commissions vary.
$2,500 minimum investment. Waived with automatic $200 monthly investments.
No IRA account fees.

T. Rowe Price
A majority of funds with T. Rowe Price have expense ratios that are lower than Lipper averages. That means more investment dollars are working for you and not the broker. Annual fees on mutual fund accounts can be avoided by maintaining a $5,000 minimum balance. Or if you have a $50,000 balance or more of T. Rowe Price investments. The minimum amount for opening an IRA with T. Rowe Price is $1,000. However, they waive their minimum investment requirement when you participate in their Automatic Asset Builder Service with contributions of $50 or more per month.

Commissions: On T. Rowe Price funds there are no-load funds that have no commissions or sales charges. There can be early redemption fees.
Minimum Investment is $1,000. With $50 or more monthly investments, the minimum investment can be waived.
Account Fees: If balance is under $5,000 there is a $10 IRA account fee. If an individual maintains a T. Rowe Price balance of $50,000 or more, the account fee is waived.

If you would like to trade ETF’s or individual stocks and prefer an approach that is more hands-on, consider opening your Roth IRA account through one of the discount brokerage firms. Individual stock trades are less expensive than they are with a majority of mutual fund companies.

Traditional IRA
The Traditional IRA can be simply defined as a retirement vehicle that is tax deferred. Traditional IRA plan contributions can be tax deductible. It depends on what the taxpayer’s income is as well as tax filing status among other factors. Traditional IRA contributions are pre-tax, which means contributions are made with money that hasn’t been taxed.

The main benefit of investing pre-tax dollars is there is the potential for lowering the current tax bracket that you are in. Your money continues to grow on a tax free basis until you are ready to withdraw the funds. Qualified withdrawals are then considered ordinary income and can be subject to income taxation.

Income Limits: Anyone can contribute to Traditional IRAs. However, everyone will not receive a tax deduction benefit. There are deductibility limits to Traditional IRAs.

Withdrawals: Holders of a Traditional IRA are eligible for making IRA withdrawals at the age of 59 ½. The withdrawals are then taxed just like other forms of ordinary income. Early withdrawals, with a few exceptions, are subject to stiff penalties.

Required Minimum Distributions: Traditional IRA owners must start to make Required Minimum Distributions when they turn 70 ½. Every year holders of a Traditional IRA must make minimum withdrawals whether they need that money or not.

Traditional IRA Advantages: They are several key advantages to investing in Traditional IRAs. They are primarily tax advantages. At the time you invest in a Traditional IRA the tax savings may lower your taxable income and result in a tax bracket that is lower. Also, many people after they retire are in lower tax bracket than during their working years. Therefore when funds are withdrawn they may be taxed at a lower tax rate. Depending on what your income level is, investing in a Traditional IRA may place you in a lower tax bracket while you are working. Then after you retire and withdraw your money you may be taxed at a lower rate because your income level is lower.

Traditional IRA Disadvantages: The main disadvantage to a Traditional IRA is its minimum required distribution. It requires that an IRA owner make withdrawals- whether they need the money or not. Also, it isn’t easy determining what your retirement tax rate is going to be.

Roth IRA
A Roth IRA, simply defined, is a retirement vehicle that is tax exempt. Roth IRA contributions when made aren’t tax deductible. However a qualified distribution that is made in retirement is not subject to tax.

Income Limits: Individuals with the tax status of Single can’t earn more than $95,000 and for Married $150,000 is the maximum annual income level.

Withdrawals: the minimum age for withdrawals is 59 ½. At the time money is withdrawn it is not taxed. Also, withdrawals on the principal can be done without penalty at any time. If earnings are withdrawn early, however, they are subject to penalties and taxes.

Required Minimum Distributions: Roth IRA accounts have no minimum distribution requirements.

Roth IRA Advantages: Tax free withdrawals on earnings and principal is the biggest advantage for Roth IRAs. Not having minimum withdrawal requirements is another important advantage.

Roth IRA Disadvantages: The income limits mean not everyone will qualify to invest in a Roth IRA.

Traditional or Roth- Which IRA is the Best?
Investing in an IRA is a great way of diversifying your taxes for your retirement years. Both types of IRAs have distinctive advantages. If you have an option for investing in your employer’s 401(k) or other types of retirement plan that is tax deferred, you may want to choose a Roth IRA. That way you have investments that give you a current benefit through decreasing your taxable income through the 401(k) contributions and also having a Roth IRA investment to provide you with tax free withdrawals after you retire. It’s every hard, and sometimes impossible, predicting what our tax brackets will be in the future. That’s why tax diversification is such an important benefit when it comes to retirement planning.

You should thoroughly investigate your personal situation before investing in any plan. That way you can determine which type of IRA is best for you and your situation. If you meet the eligibility requirements for both types, you can split your investment, therefore taking advantages of tax benefits both now and after you retire.

Invest Money
Once you have an emergency fund established, you should start to invest. There are thousands of ways, literally, to invest. This will just cover basic principles of investing.

Pay Yourself First
Investing should be added to your budget. You should make the process automatic. Invest before seeing the money. That way you don’t have to worry over finding money or time for investing if you have a system in place. The only time you will need to worry about anything is the times when you want to rebalance your allocations a few times a year, or when you decide to make additinonal investments.

Make It Automatic
The same princples that apply to automatic savings apply to automatic investing as well. Set the process up to be automatic so you don’t have to think about your investing. This way it will get done every time, on time. One way that many people invest is through payroll deductions into retirement plans sponsored by the employer such as a 401(k) plan, pension plan, Thrift Savings Plan or other types of defined benefit plans. Automatic deposits can also be set up for investing in IRAs, single stocks, mutual funds and other types of investments. Investing through an automatic process is a painless and easy way of making sure you keep up with your investing.

Invest in Retirement Funds with Tax Advantages
401(k) plans and IRAs are the retirement funds that most people are familiar with. However there are other types of retirement accounts with tax advantages such as 403(b), TSP, 457, pension and defined benefit plans and multiple types of IRAs, including Traditional and Roth IRAs. Another great thing is that you can have multiple retirement accounts.

There are additional benefits to these types of retirement plans compared to investments that are taxable. Your investments can continue to grow without their value being dragged down by taxes each year. With tax deferred plans like the 401(k) or Traditional IRA, your money is invested with pre-tax dollars. When you withdraw your funds during retirement you pay taxes on them. Other types of tax advantaged plans can be just the opposite, where you pay the taxes upfront but enjoy growth and retirement withdrawals tax free.

Find out what the eligbility requirements are for the different types of accounts to see which ones you qualify for. Then take advantage of these plans, particularly if you will receive employer matches on your contributions.

Once You Have Contributed to A Retirement Account Leave Your Money There
Once money has been contributed to a retirement account, the best thing for you to do is leave it there. When you change your job don’t cash in your 401(k), don’t take out 401(k) loans, and don’t cash in your IRAs or other types of reitrement accounts before you reach retirement age. There are steep early withdrawal penalties on retirement accounts. When you change your job there are several options for what you can do with your 401(k). Research your options to find out which one is best for your situation.

Watch Your Asset Allocations
Assset allocation refers to how your money is divided up among different investments. When it comes to the best way of allocating your assets, there are many different theories. However, since everyone has a different situation, there really is any way of covering every possible type of asset allocation in one article. Look for a mix that is approriate for your risk tolerance, time horizon and financial goals. There is an asset allocation primer available from the SEC. You can also find investment books at the library. If you are still in doubt, life-cycle funds are a good place to start. They use a professionally determined investment mix tailored to various time horizons. They are great places to start. Once you become more familiar with your risk tolerance and investment needs, you can branch out from there.

Diversify Your Investments
Unfortunately we don’t know what the future performance of a particular stock or investment will be. If we did, we could just invest all of our money and wait for it to rise in value and then cash in and live a king’s life. Since we don’t know, it’s better not putting all of our eggs into one basket.

Diversifying your holding is a much better solution. You can do this through buying investments from different classes and sectors of assets, including, bonds, stocks, mutual funds, index funds, precious metals, real estate, small size funds, mid size funds, large funds, value funds, growth funds, international funds and more. At first it might seem daunting. A good place for you to start would be lif-cycle funds because they atomatically diversify your time horizon for you. Once you have learned about other kinds of investments more you can move your money or add new investments. The most important things is to start to invest as soon as possible.

Start To Invest ASAP and Don’t Stop
One of the universe’s most powerful forces is compound interest. The longer you allow your money to grow in value, the greater compound interest’s impact will be. Your first million dollars is the hardest to get. If you start to invest at the age of 25 and invest $15,000 a year with a 10% gain, you will have $1 million in 20 years. However, if you continue to invest after that time you will be at $2 million in only six more years, in 4 years you will have $3 million, in another 3 years you will have $4 million and then two additonal years each for reaching $5 to $7 million, and then in just one year you will be at $8 million. The effects of compound interst are amazing. Time is the key ingredient of compount interest. Get started today!

My husband has been contributing the maximum match with his employer 401k. He took out a majority of it, $34,000, last year and transferred to a Traditional IRA. He used a CD of 7 months for the IRA because he was considering taking out $20,000 in July and pay his truck off and then using a Roth IRA for rolling the rest of the balance into. He plans on continuing to contribute to the 401k for another year when he will retire. At this point that is our plan. What is your advice?

First of all, maximizing contributions in order to meet his company’s 401k match is the right thing for your husband to be doing. Taking advantage of any free money is always good. That is what a company match is. However, you shouldn’t ever interchange retirement accounts with savings accounts. You also should n’t use them for meeting short term goals. A retirement account works the best when you use it for just one thing- retirement.

There are some great tax deferral benefits given by the government for Traditional IRAs and 401k plans. Roth IRAs have a different investment benefit, but it is just as valuable over the long term. In exchange for these benefits, there are strict penalties on early retirement account withdrawals. First there is a 10% penalty and then you are also taxed on earnings if the 59 ½ age requirement isn’t met.

The information you provided was limited. If penalties won’t apply because minimum age limits have been met for withdrawing money, then early withdrawal penalties aren’t something you will need to worry about. However, there will still be taxes due upon withdrawal. Another concern I have is whether you have enough money or not set aside for retirement. I strongly advise you to carefully review you retirement plan to see whether you have sufficient resources for supporting your retirement.

Another things you need to consider is having an emergency fund if you don’t already have one. If not you might want to think about keeping that $34,000 as an emergency fund or the $14,000 remaining. An online savings account is a great place for keeping the fund because it has decent interest rates but is still liquid.

Withdrawing money out of tax advantaged accounts comes with serious penalties. Unless you have serious financial difficulties such as a bankruptcy that is imminent, I don’t think withdrawing IRA money is a good idea.

Do you have enough money for retirement? If money is withdrawn for paying off the truck, that leaves you with about $15,000 plus social security. Maybe I missed something. The amount of income that can be generated from $15,000 over the long term is around $50 per month. Have you gone to the Social Security website to have an estimate done on what you would probably qualify for?

Thank you for contacting us. I wish your husband and you all the very best with your retirement plans.

How a 401K Plan to IRA Rollover Works
It’s easy to roll a 401K to an IRA. There are basically three steps. The first step is to open an IRA account. Next you have your funds transferred into your new IRA acount using either an indirect rollover or trustee-to-trustee transfer. The final step is to allocate the funds. The most important step is the second one. It can have tax consequences.

These steps are very similar for transferring Thrift Savings Plan, 403(b), 401(k) and other types of retirement plans that are tax deferred.

Opening an IRA Account
This only takes a couple minutes. You just need to choose a financial institution and open an account. Then you sign the paperwork, transfer the funds, and then allocate the funds.

Rolling your 401k Assets Over Into An IRA
You have two major 401k rollover options to consider for transferring your assets to an IRA. You can either use an indirect or direct transfer. Another option is to transfer your funds into an IRA to act as a conduit, a Traditional IRA, for holding your 401(k) assets. Then when you have a new qualified retirement plan that you want to invest in, you can transfer the funds.

Indirect IRA Rollover
With this method, you are given a check that is equal to your 401k account balance less a 20% automatic tax withholding. You must deposit the whole amount from your former plan to a tax deferred retirement plan within 60 days. If you fail to do so any amount that isn’t deposited is treated for tax purposes as a withdrawal and could be subject to early withdrawal penalties and income taxes. You might end up needing to pay 20% from your own funds to cover the automatic withholding. When your taxes are filed the next year, you’ll received the 20% back in the form of a tax refund. In the meantime, however, you are financially responsible for making up the difference. There is a way that is easier, thankfully, for rolling your 401k over that avoids tax withholdings and deductions.

401k Plan Trustee-to-Trustee Transfers
This is a form of indirect transfer that will move the assets in your 401k plan into another qualified retirement account without you needing to worry over cashing out or having to pay early withdrawal penalties or taxes. This allows you to easily and safely transfer your funds without having to worry about finding that 20% or failing to deposit your assets in time or make any other kinds of mistakes in the process. It’s easy filling the paperwork out. Most investment houses, brokerages or banks will be more than happy to assist you. After your paperwork has been completed, the funds transfers will be initiated by your new financial institution from your old plan.

Allocating Your Funds
You will usually be able to select the funds that you want to make investments in before transferring your assets from your old 401k plan to your new IRA. However, an IRA custodian might move your funds into a savings account with a high yield or money market account until the transfer is complete. Once that has happened you can then allocate your funds in a way that matches your investment needs and risk tolerance.

Things To Watch Out For in 401k to IRA Rollovers

• Rollover contributions aren’t counted towards your yearly IRA contribution limit. You will still be able to contribute the maximum allowable amount based on your income and age.
• If you have a Roth 401k plan you can roll it to a Roth IRA automatically and Traditional 401k plans roll to Traditional IRAs automatically. It is possible to transfer Traditional IRAs into Roth 401ks, however you will have to meet particular income qualifications and there will be taxes that need to be paid. For more details you should consult with your financial planner or broker.
  401k plans are all required to allow trustee-to-trustee transfers
• Before you transfer your 401k plan, verify tax considerations, fees and transfer eligibility.
• If your 401k plan contains company stock you might want to consult with a financial planner
• If you have any doubts or questions, consult with your certified financial planner or broker before you make any final financial decisions

Withdrawal Rules for Roth IRAs
In general you are able to make penalty and tax free withdrawals at any time on the principle (your contributions). However, you cannot withdraw earnings on the principle before the age of 59 ½. Otherwise you will be subjected to an early withdrawal 10% penalty. Usually earnings can be withdrawn without incurring a penalty after the age of 59 ½ as long as you meet the five year rule requirement.

5 Year Rule for Roth IRAs
Roth IRA withdrawals are only considered to be qualified distributions if they are withdrawn at least five years since the Roth IRA account was opened and you contributed to it, no matter what your age was at the time the account was opened. For example, usually withdrawals made at the age of 59 ½ or older can be made penalty free. However, if your first contribution was made when you were 58 years old, you have to wait until you are 63 to withdraw any earnings on the contributions without incurring a penalty.

These rules do have exceptions. Before making any distributions or withdrawals you should consult with your financial adviser.

Non-Qualified and Qualified Roth IRA Distributions
Before you take any Roth IRA distributions or make a withdrawal it’s very important that you understand what the difference is between non-qualified and qualified distributions. A qualified distribution, as long as you have have met the five year rule, will be penalty and tax free. This is very important. Taxes and penalties can result in serious erosions to gains earned on your investments. Non-qualified distributions can trigger early withdrawal penalties and taxes, and result in lowering the investment value of your Roth IRA investments.

Qualified Distributions- these withdrawals are penalty and tax free. Usually withdrawals made by someone who is 59 ½ years or older will be considered qualified distributions, as long as the 5 year investment gains rule has been met.

IRS Publication 590 states that the following requirements must be met in order for a distribution or payment on a Roth IRA to be a qualified distribution:

1.The distribution or withdrawal is made following the five year period that a Roth IRA account was set up and contribution made and

2.The distribution or payment is:

• Made at the age of 59 ½ or older
• Made due to a disability
• Given to your beneficiary or estate following your death, or
• A distribution that meets the First Home Exceptions from chapter 1 (with a lifetime limit of $10,000).

Non-qualified Distributions- these are withdrawals that don’t meet the qualified distribution requirements. They can be subject to early withdrawal penalties or taxes. Non-qualified distributions are usually classified as ordinary income for tax purposes and subject to an early withdrawal penalty of 10%.

Early Withdrawal Penalty Exceptions
There are exceptions which make Roth IRA withdrawals subject to regular income tax but not the early withdrawal 10% penalty. They include:

• Distributions made as a series of payments that are substantially equal (the longer of five years minimum or until the owner of the Roth RA is 59 ½ years old).
• Unreimbursed medical expenses are more than 7.5% of AGI (Adjusted Gross Income)
• You are making medical insurance premiums following a job loss
• Distributions do not exceed you higher education qualified expenses (for you or any family members that are eligible).
• The distribution is because of a levy being placed on the qualified plan by the IRS
• The distribution qualifies as a distribution for disaster recovery assistance
• The distribution qualifies as a distribution for recovery assistance

Roth IRA Distribution Order
The IRS does help taxpayers with making penalty free Roth IRA withdrawals form their accounts. They assign an order to IRA withdrawals. According to Publication 590 from the IRS, distributions from a Roth IRA happen in this order: (1) regular contributions, (2) rollover and conversion contributions, using the method of first-in first-out, and (3) earnings on contributions.

Regular contributions get withdrawn first. You can withdraw them any time without incurring any penalties or taxes. The taxable part of your withdrawals isn’t until the end. This makes it easier to make penalty free withdrawals.

Roth IRA Withdrawals used for College Expenses or a First Home Purchase
There is a feature that Roth IRAs have that allows an account holder to make a withdrawal that is considered a qualified distribution when used to pay qualified college expenses or the purchase of a first home.

Roth IRA early withdrawals can be used for buying a first home. The life time maximum on each account is $10,000. The withdrawals can be for purchasing your own first home, but can also be used to benefit children or grandchildren. Whoever the money benefits, there is still the $10,000 limit.

Early withdrawals from a Roth IRA can also be used to pay college expenses without having to pay early withdrawal penalties. The higher education qualified expenses can be for your own education as well as your spouse, children or children’s descendants.

Early Withdrawals on a Roth IRA- Pros and Considered
Most other types of retirement accounts do not offer the same amount of flexibility when it comes to being able to make penalty and tax free withdrawals. However, just because you are able to do so, doesn’t mean it’s a good idea. You may need to pay penalties or taxes for withdrawing some of your retirement money, however it can still damage your retirement planning long term.

A Roth IRS provides great tax diversification opportunities. Making an early withdrawal, whether it is qualified or not, will put a damper on your retirement plans and limited how much money will be there for you during your retirement. One of the universe’s most powerful forces is compound interest. If you make withdrawals, it will limit how much money and how much time you have for letting your money compound and work for you. This can potentially reduce your retirement nest egg. Before you make an early Roth IRA withdrawal, strongly recommend that you look into all of your options.

All the retirement plans that will discussed here are available for one person businesses with no employees. My discussion will be limited to business owner contributions. However, the plans do require that qualifying W-2 business employees be covered. Contributions for employees also have special rules that apply.

SIMPLE Plan
One option for self-employed retirement is a SIMPLE plan. SIMPLE is the shortened version of “Savings Incentive Match Plan for Employees.” SIMPLE plans are compensation deferral plans. The concept is similar to basic employee-sponsored 401(k)s.

Establishment of a SIMPLE Plan and Contribution Deadline

In order to be effective for a tax year, SIMPLE plans have to be established no later than October 1st. Once the plan has been established, contributions can be made until the 1040 due date, including extensions.

Contribution Limits- a SIMPLE plan is a form of deferred compensation. There there are lower contribution limits. For 2008 the maximum contribution to a SIMPLE is $10,500. If the individual is 50 years old or older by the end of the year, an additional $2,500 can be contributed. For 2009 the maximum is $11,500 and an additional catch-up contribution of $2,500 is also allowed.

The amount that can be contributed to a SIMPLE plan isn’t limited to business profit percentages. Up to 100% of a business’ net profit as reported on Schedule C-EZ or C can be contributed up to the maximum contribution amount. If the business’ 2008 net profit is $10,000, the maximum contribution will be $10,00. If the profit is $25,000, a maximum of $10,500 is allowed, or $13,000 if the individual is 50 years old or older.

Employer match requirement- SIMPLE plans require employer matches of 1-3%. This means that an owner-employee self-employed person with $25,000 net profit will be able to contribute up to $13,750.

SIMPLE Plan Benefits
One SIMPLE plan benefit for owners is that a business that has a lower net profit is allowed to set a larger percentage aside of the profit for retirement. This is great for sideline businesses where an owner may have other income, such as from W-2 wages that are sufficient for covering living expenses.

Other SIMPLE Plan investment benefits include:

• Immediate Vesting. Just like with SEP IRA, SIMPLE contributions go into Traditional IRA accounts. The minute a contribution is made, participants are vested 100%.
• Roth or Traditional RA options. Taxpayers can contribute maximum amounts to both a SIMPLE-IRA or SEP-IRA as well as a regular Traditional IRA or Roth IRA if the person qualifies
• Minimal costs. Both the SIMPLE-IRA and SEP-IRA have minimal to no costs for establishing the plan. There is also no annual paperwork required, such as filing a report or return with the government.

2010 Roth IRA and Traditional Contribution Limits
2010 contribution limits for both the Roth IRA and Traditional IRA are $5,000 for individuals less than 50 years old. Individuals 50 years or older can make catch up additional contributions up to $1000, mean that their total contribution limit is $6,000. During one tax year, you can invest in both a Traditional IRA and Roth RA. However the combined contributions for both accounts can not exceed your contribution limit. There are different rules for self-employed retirement plans. You will need to check with your financial adviser or account and review the various tax plans for the self-employed.

Phase Outs for Roth IRA and Traditional IRA Deductions
There are specific rules from the IRS in terms of who is eligible to make IRA contributions. Eligibility guidelines for Roth IRAs and Traditional IRAS are based on the Modified Adjusted Gross Income (or MAGI) of the taxpayer. This gets calculated at the time you file your income tax return.

Traditional IRA Deductions
Contributions to a Traditional IRA are tax deductible, unless your income is higher than the deductibility phase out determined by the IRS. Starting at the $55,000 level, Traditional IRA contributions start to phase out. When earning over $65,000, none of the contribution can be deducted. For the filing status married filing jointly the phase out range is from $89,000 to $109,000.

Phase Out For the Roth IRA
Roth IRAS are subject to IRS phase out rules, just like Traditional IRAs. When tax filers have a MAGI over $105,000, they won’t be able to contribute as much to a Roth IRA. For married filed jointly, the phase out starts at $167,000. Single filers with MAGI over $120,000 and $176,000 for married filing jointly, are not eligible to make contributions to a Roth IRA.

Making 2010 Contributions to an IRA
You can make 2009 IRA contributions through April 15, 2010. For 2010, IRA contributions can be made starting on January 2, 2010 through April 15, 20111. If you make contributions to an IRA from January 2 through April 15, you need to designate the tax year that your contributions were made for.

How Roth IRAs Work
Roth IRAs are retirement plans with tax advantages. They offer investors a chance of making contributions with money that already has been taxed, along with the ability of making withdrawals that are tax free while in retirement (59 ½ years old and older). This benefit is huge for investors. Your money gets taxed only once, at the time that you earn it. Then via compound interest it grows, without getting dragged down by taxes, until a qualified distribution is made. Qualified distribution is the key here. You aren’t able to take you money out any time. You must adhere to certain Roth IRA withdrawal rules.

A Roth IRA is not an investment, rather it is an investment vehicle. Another thing that’s important to know about Roth IRAs is they aren’t actual investments. Rather, they are accounts for investing in. This misconception is a common one. A common question in fact is, where can I get the best rates on a Roth IRA. You don’t earn rates on a Roth IRA. A Roth IRA is an account holding investments. The investments earn interest or grow in value, not the Roth IRA account. Most types of investments can be used for a Roth IRA.

Withdrawal Rules and Contribution Limits for Roth IRAs
There are contribution rules for Roth IRAs, including maximum income levels that make you eligible for contributing to Roth IRAs and maximum annual contribution levels. Basically only a certain amount can be contributed to Roth IRAs. Once a certain level of income is reached, only a portion or none of the maximum contribution limit can be contributed to a Roth IRA.

What happens if too much is contributed to a Roth IRA? There are specific contribution limits for Roth IRAs. If the contribution limits are exceeded you could be subject to an excise tax of 6%, which an can be assessed on an annual basis until the matter is resolved. If you withdraw any excess contributions prior to the tax deadline or reassign excess contributions into future tax years, you can avoid paying that 6% excise tax.

There are also withdrawal rules for Roth IRAs. Account owners of a Roth IRA can make withdrawals from their contributions any time and not need to pay early withdrawal penalties or pay taxes. There are, however, limitations concerning when earnings made on the contributions can be withdrawn. Earnings, under most circumstances, can’t be withdrawn without penalties or taxes until the age of 59 ½ or older. The 5 year rule must also be met. Earnings must stay inside the Roth IRA account for 5 years or more before being withdrawn. These rules do have exceptions. These include qualified college expenses and first time home buyer expenses, as well as other certain instances.

Roth IRA Benefits
Roth IRAs, in addition to having great tax benefits, are also one of the more flexible types of retirement plans that can be opened. Having the ability to withdraw all or some of your contributions and not be penalized provides flexible options that most retirement plans don’t offer. There is also no required minimum distributions for Roth IRAs, meaning you won’t be required to make withdrawals after you retire until you need or want the money. A Roth IRA also offer a hedge against any future tax rate increases. It’s easy to determine your current tax rate. However, there is a lot of uncertainty when it comes to any future tax rates you may be subject to. If potential tax increases are a concern to you or you are thinking you could end up in high tax brackets due to additional income, a Roth IRA could be important for your financial planning.

A Comparison of Roth IRAs with Other Types of Retirement Plans
There are different benefits offered by a Roth IRA compared to other types of retirement plans as well as taxable investments which don’t provide any tax benefit. The main benefits for a Roth IRA investment is the tax free withdrawals that can be made in retirement, the ability of making penalty free and tax free withdrawals on contributions whenever you want to, and no minimum distribution requirements, which allows you to leave your money in your account to compound for a longer period of time.

Comparing Roth IRAs with Traditional IRAs. Roth IRAs and Traditional IRAs have several similarities. These include their name, the places where the accounts can be opened, and contribution limits (both Roth IRA and Traditional IRA contributions have income limits in order for them to be tax deductible). These two types of retirement accounts also have some differences. The main differences between Roth IRAs and Traditional IRAS are when and how money is taxed as well as when and how withdrawals can be made on investments.

Contributions to a Traditional IRA can be tax deductible. When withdrawals are made, the money is taxed. Contributions made to a Roth IRA have been taxed already. Therefore qualified withdrawals and distributions are tax free. Another major difference is when and how withdrawals are made. Roth IRAs and Traditional IRAs both have a minimum age requirement of 59 ½ for withdrawals to be free of penalties. However account holders of Traditional IRAs are subject to minimum required distributions once they become 70 ½ or face a stiff tax penalty. There are no required minimum distributions on Roth IRAs.

Comparing Roth IRAs with Traditional 401Ks. There are companies that offer both Roth 401K and Traditional 401K plans. A Roth 401k has some benefits that are similar to the Roth IRA but follow 401k plan contribution limits. A Traditional 401k plan is more like the Traditional IRA. It offers current tax deductions and then is taxed when funds are withdrawn in retirement. There is also a minimum distribution age requirement with a 401k plan.

One common question people have is where they should invest first, in an IRA or 401k. A Traditional 401k, for most people, is the better option when their employer provides a company match with their investment. The best thing to do is take that free money and then if you are able to afford contributions beyond that open a Roth IRA account.

Another question people have is wanting to know if there is a limit on the number of retirement accounts they can have. Actually you can have multiple retirement accounts. Some people have retirement plans that are employer sponsored, like a 401k plan or 403b plan, IRAs Thrift Savings Plans and other types of retirement plans like a self-employed plan. You are able to have IRAs with different financial institutions. For tax purposes they are considered as one IRA, which means you aren’t able to exceed the contribution limits for that year through opening a multitude of IRA accounts with different brokerages or banks.

Who Needs a Roth IRA?
I think personally that Roth IRAs are great investment options. Anyone eligible for opening a Roth IRA should consider one. For people in lower tax brackets currently than they think they may be in the future, Roth IRAs are a great deal. The advantage is to pay low tax rates now and then in future make withdrawals that are tax free after they are in retirement and possibly facing higher tax rates.

Roth IRAs are great for young people. In comparing Roth IRAs and Traditional IRAS for younger investors, younger individuals are usually in lower tax brackets now than they will be later on. For most people income potential grows over time. You individual situation could vary.

Military members can also benefit from Roth IRAs. There are some specific Roth IRA benefits available to members of the military that are not offered to civilians. For those serving in tax free war zones, they can make tax contributions. There is also the ability of making tax free withdrawals at retirement age (contributions, capital appreciation and withdrawals are all tax free). Some members of the military may also be given more time for making Roth IRA contributions beyond normal cutoff dates if their duties with the military provides for a tax extension.

How To Open Roth IRA Accounts
It’s very easy to open Roth IRA accounts. It only take about 10 to 15 minutes of your time. Just go to your preferred brokerage company or bank. Then fill out the paperwork and fund the account via a money transfer or deposit. That’s it. Before opening an account, do some upfront research ahead of time.

How To Get Started With Your Roth IRA Account
To open a Roth IRA account just takes 10 to 15 minutes. Once you’ve done that you just need to make your contributions.

Currently, the maximum contribution for Roth IRAS is $5,000. You may not be able to contribute that all at once. Most people can’t. One great way of investing is to set automatic investments up to go automatically into your Roth IRA account. Figure out how much you afford to contribute on a monthly basis. Then each month have that amount transferred into your account automatically. If you make the process automatic, you are much more likely to contribute every month. When you have to write a check each month, there is the chance that you will forget or decide not to invest.

Dollar cost averaging is another thing you can take advantage of. It’s a great way of investing for the long term. Using dollar cost averaging will ensure that when asset values are low you purchase more investments and when the values are higher you will purchase fewer. Over the long run this usually averages out favorably for you.

Don’t wait. Open your Roth IRA account today.