Roth IRA

Custodial savings accounts and section 529 savings plans for your children are good because they provide some tax advantages. But they also will count as assets owned by the family and can have a negative impact on financial aid eligibility. This is especially true at private colleges where you will be denied financial aid because your children have custodial savings accounts and section 529 savings plans. Thus the tax savings in custodial savings accounts and section 529 savings plans is small compared to the financial aid lost as a result of saving in the wrong pocket.

What is the best solution? Roth IRAs and/or more specialized, liquid life insurance policies are better options. Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law and named after its chief legislative sponsor, the late Senator William Roth of Delaware. What happens in Roth IRA? You hire your children to handle domestic work and save their pay into a Roth IRA. Pay each child as much as $8500 a year. Deduct the total earned by children from your business income thus paying less income tax, Medicare tax and your Social Security tax. Your children pay no income tax, no payroll taxes, no Social Security tax, no Medicare tax and no unemployment/disability tax.

It’s not necessary to have a business to hire your children to do domestic duties. Children working for their parents at home do not violate any labor laws but the children have to be at least 7 years old. Save the children earnings in Roth IRA accounts which are tax-free from age 7 years old until when the children reaches the age of 18 years old. After the children reaches age 18 advice them to retain the savings in the same tax-free Roth IRA accounts until they are age 50 and above. This will make the best saving for your children. To most parents, children are the most valuable things that they have. It is morally right to save this way using Roth IRA accounts, and at least in the eyes of God you did your part.

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Roth IRA’s provide an attractive investment opportunity for individuals who are eligible to contribute to it. The major advantage of Roth IRA is that earnings grow tax-free and if the qualified distribution conditions are met, there are no taxes on withdrawals. By starting a Roth IRA early, the money will grow tax-free for many years.

There is no age limit for opening a Roth IRA’s, which means that a Roth IRA can be opened even for minors. The only requirement is that a minor needs to have earned (taxable) income to contribute to a Roth IRA. Many IRA providers allow starting minor accounts as long as the minor or his parent can provide proof that the minor earned it.

Advantages of Starting a Roth IRA for Minors

• The power of compounding - A Roth account started at a minor age will grow tax-free for fifty or more years, so even if only a small amount is invested each year, it will grow to a sizable amount by the time the minor retires.
• No taxes, ever - The amount that a teenager earns by doing his summer job or by assisting a parent in his/her business is usually too small to be taxed. This means that when he contributes the same amount to a Roth IRA’s he is not paying taxes and as the earnings grow tax-free, he doesn’t have to pay taxes ever.
• A parent can make contributions on behalf of the child - IRS doesn’t stipulate that the amount contributed must be the same amount that was earned by the child. Even if the child spends whatever he earns, a parent can contribute a matching amount.
• Saving for down payment of home - A Roth IRA’s is intended for retirement, but it can also be a great way to save for the down payment for purchasing the first-time home for the minor. A first-time home purchase is a qualified distribution which means that there is no 10% penalty for taking a distribution.

The only drawback for opening a Roth IRA in the name of a minor is that the ownership of the account passes on to the child when he attains maturity, so a parent will not be able to control how his son/daughter spends his/her account.

Earned Income

Many IRA providers allow opening minor accounts, but a parent needs to submit proof that the contributing amount was earned by the minor. The income has to be taxable compensation income and income from investments are not permitted.

• As long as the compensation is a reasonable amount for work actually performed, there is restriction for a child to accept payment for helping his/her parent’s business.
• IRS do not specifically disbar a minor from contributing income earned by doing household chores, but as payments to family members for household chores are not taxable income, financial advisers do not recommend using them for contributions to IRAs.
• If a child earned income by doing odd jobs like baby sitting or mowing the lawn in the neighborhood, it will still qualify as earned income if proper receipts and records are maintained.

Starting a Roth IRA’s at a young age can also be a good lesson on financial management and fiscal responsibility. In fact it can be one of the greatest gifts a parent or a grand parent can bestow on a child.

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Paying more taxes now so you won’t have to pay them later sure doesn’t sound like a great deal during a recession.

For most people, though, that’s exactly what it is.

Financial experts say converting a traditional Individual Retirement Account to a Roth IRA in this environment is a sure-fire bargain for most people over the long haul. The bigger payoff simply comes later.

The incentive to convert relates to the big future tax hit looming for holders of traditional IRAs when their withdrawals are taxed. Because contributions to a Roth are made with after-tax dollars and not deductible, there is no immediate tax break. But you won’t have to pay any tax on your money when you eventually take it out.

Yet many Americans remain unfamiliar with the Roth’s rewards.

“So many people haven’t discovered or realized what a huge tax savings a Roth can be,” said Mary Van Nostrand, a certified financial planner in San Diego. “I think it’s one of the best-kept secrets in investments.”

That may change in 2010 with the expiration of rules that prohibit anyone with an adjusted gross income of over $100,000 (single or married joint filers) from converting their IRAs to Roth.

In the meantime, the down economy already has sweetened the Roth’s appeal.

For one thing, shriveled IRA values mean significantly less tax to pay in converting to a Roth than would have been the case before the market plunged.

Then there’s the growing prospect of higher state and federal income-tax rates as a result of the economic crisis.

A Roth IRA is generally most appropriate for people who will be paying more taxes in retirement than they are now. Ultimately that could apply to most everyone, since many experts consider it likely if not inevitable that tax rates will be raised in coming years to help fund the government’s rash of emergency spending.

So, you can effectively pay your IRA taxes at a discount if you do it soon rather than far in the future.

“You can buy off Uncle Sam as a partner on your retirement account at bargain rates,” said Ed Slott, a Rockville Centre, N.Y., accountant who specializes in retirement issues. “Once the market comes back, you’re going to be sitting pretty with money that will never be taxed again.”

Named for its chief sponsor, the late U.S. Sen. William Roth Jr., the Roth IRA was established by the Taxpayer Relief Act of 1997. It was the first account to allow earnings to grow income tax-free and Americans to make tax-free withdrawals for retirement.

The pluses are numerous:

— While money contributed to a Roth IRA is not tax-deductible, withdrawals after age 59½ are untaxed if the money has been in the account for at least five years.

— Unlike with regular IRAs, there are no mandatory withdrawals starting at 70½ and you can keep contributing to it as long as you want.

— It is an attractive option for estate planning because any balance in the account when you die goes to your heirs with far fewer taxes attached. While the value of the Roth will be subject to estate taxes, the heirs won’t have to pay income tax on the money when they withdraw it.

A majority of taxpayers are eligible to open a Roth IRA. Joint filers with adjusted gross income below $176,000, and singles below $120,000, qualify for 2009.

Still, it remains somewhat overlooked as a way to lock in tax-free income at retirement. Only 18.6 million U.S. households, or 16 percent, had Roth IRAs as of May 2008, according to the Investment Company Institute, a mutual fund trade group.

The downside of converting an IRA to a Roth, of course, is having to come up with extra money for a tax bill during a nationwide cash crunch.

Economist Alicia Munnell said that while the long-term math argues in favor of the Roth, many have held back because of the pay-now aspect.

“Taking your whole pile (of IRA money) and paying taxes earlier than you have to seems scary,” acknowledged Munnell, director of the Center for Retirement Research at Boston College.

But it doesn’t have to be all or nothing, especially if it pushes you into a higher tax bracket — you can convert as little or as much of the IRA as you want.

Mike Denton, 63, of Chelsea, Ala., is just completing converting his approximately $100,000 IRA to a Roth. He did it over five years so the withdrawals wouldn’t bump him up to a higher tax bracket.

Over that period, he’s been sending the government a little over $1,000 in estimated tax payments every quarter to cover the conversion costs.

When it began, he was in a 15 percent tax bracket that he knew would rise once numerous pension, Social Security and other regular income for him and wife Randy all kicked in.

“Yeah, it hurts to a certain degree,” the retired Army lieutenant colonel said of the payments. “But it was to my advantage financially to pay the taxes at that point rather than wait until down the road when I may be in a higher tax bracket. And who knows, the way things are going in Washington I may be in a higher tax bracket next year.”

Denton is happy the process is almost over and has no doubt it was worth it. The goal all along, he said, was to make sure the money would one day go directly to his son and daughter without them having to incur extra taxes.

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Assuming  you are investing for future retirement, you should seriously consider the Roth IRA (Individual Retirement Account).  I am already a huge fan of the Roth, but as the national debt increases with each federal bailout, the Roth is looking better all of the time.

Save Taxes on Down The Road

Let me explain.  With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement.  The Roth, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn.  When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA.  Why?  Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.

Will Tax Get Cheaper?

But I ask you: do you seriously believe that  the tax structure when you retire will be essentially the same as it is today?  Is it possible that even if your retirement income is less than your working income,  your tax rate could be higher than it is today?

I just don’t see how we can ever pay down our $10 trillion national debt without hiking taxes.  My longhand math (calculators don’t have that many zeroes) indicates that we owe $30,000 for every man, woman and child in America.  To compound the problem,  the Social Security Trust Fund is scheduled for depletion in about 30 years unless “something” is done.  That ”something” will have to be higher taxes or less benefits.

Our future tax structure is very uncertain because of our national crash course with debt.  Pay your taxes today with a Roth instead of gambling your retirement on the uncertainty of future tax rates.

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If you’re one of the millions of American households who owns either a Traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2009, for the 2008 tax year.

In either case, this checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.

Which Account: Roth IRA or Traditional IRA?

There are two types of IRAs available: the Traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free.¹

In choosing between a Traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.

If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a Traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.

Case in point: Your ability to deduct Traditional IRA contributions may be limited not only by income, but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the best solution.

On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a Traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than make up for the lack of a deduction.

Should You Convert to Roth?

The IRS allows you to “convert” — or change the designation of — a Traditional IRA to a Roth IRA if you have an adjusted gross income of $100,000 or less. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the Traditional IRA. The withdrawal from your Traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% penalty normally imposed on early withdrawals.

The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.

Maximize Contributions

If possible, try to contribute the maximum amount allowed by the IRS: $5,000 per individual, plus an additional $1,000 annually for those aged 50 and older for 2008. Those limits are per individual, not per IRA.

Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, then that “free” money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first, and then try to maximize IRA contributions.

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