Roth IRA

Establish a Roth IRA Where you choose to establish your Roth IRA and the specific investments you choose depends on your own personal needs and preferences. You have a wide variety of choices, and you should carefully consider the matter before making your decision. How fast your Roth IRA dollars grow is more a function of investment strategy and performance than of tax exemption. Consider whether you want to establish a Roth IRA with a:

Bank

Financial institution

Mutual fund company

Stockbroker

Life insurance company

You should also consider the types of investments (e.g., stocks, bonds, mutual funds, CDs, annuities) that will best suit your goals and risk tolerance, as well as the fees that are associated with opening and maintaining your Roth IRA. Finally, keep in mind that you can establish multiple IRA accounts with more than one institution.

Tip: Employers who maintain certain retirement plans (like 401(k), 403(b), or 457(b) plans) can allow employees to make their regular IRA contribution–traditional or Roth–to a special account set up under their retirement plan. These accounts, called “deemed IRAs,” function just like regular IRAs. Advantages include the fact that your retirement assets can be consolidated in one place, contributions can be made automatically through payroll deduction, you can take advantage of any special investment opportunities offered in your employer’s plan, and your protection from creditors may be greater than that available in a standalone IRA. The downside is that your investment choices in your employer’s plan may be very limited in comparison to the universe of investment options available to you in a separate IRA. Also, the distribution options available to you and your beneficiaries in a deemed IRA may be more limited than in a standalone IRA. Because of the administrative complexity involved, most employers have so far been reluctant to offer these arrangements. Check with your plan administrator to see if this is an option for you.

You have until the due date of your federal tax return for the year (usually April 15) to make a contribution for that year If you want to make a Roth IRA contribution for the year, you have until the due date of that year’s federal income tax return. For most people, this is April 15 of the following year. Your contribution deadline is not extended by any extension you may receive to file your return. So, if you obtain an automatic four-month extension, you may have additional time to file your tax return but you don’t have any additional time to make a Roth IRA contribution.

Tip: Beginning with the 2007 tax year, the Pension Protection Act of 2006 allows you to direct the IRS to deposit all or part of your federal income tax refund directly to an IRA (subject to the normal rules governing the amount, timing, and deductibility of IRA contributions.

Designate the IRA as a Roth IRA To be a Roth IRA, the IRA must be designated as a Roth IRA at the time you establish it.

Designate the year for which the contribution is made If you contribute to your Roth IRA after December 31, you should tell the Roth IRA trustee or custodian for which year the contribution is being made. For example, if you make a contribution in February 2008 for the 2007 tax year, you should clearly identify the contribution as being made for 2007. Otherwise, the trustee or custodian may assume that the contribution is for 2008 (the year in which it is received) and report it as such. Talk to your custodian or trustee about how you should identify your contribution.