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Roth IRA

The Roth IRA is one of the greatest wealth building tools availible to the average person. A Roth IRA allows you to contribute money into an account that will not only grow tax-free, but can be withdrawn tax-free as well. The biggest misunderstanding I see about regular traditional IRAs and 401k plans is that you DO have to pay taxes on the withdrawls when you make them. All those years of tax-deferred growth make it more than worth it, but when you need $20,000 in retirement, you really need $25,000. $20,000 for you and $5,000 for Uncle Sam.

Retirement Life & Taxes - Not with Roth

The Roth IRA is different. When you take $20,000 from your Roth IRA there are no taxes. None, Zip, Nadda, Zilch. As a financial planner what makes this so appealing is that life happens even when you are retired. So, when we carefully plan and achieve a goal of providing you $5,000 a month for the rest of your life, that is great. But, when your daughter decides to get married in Italy and you need an extra $15,000 to go with your spouse in style to this once in a lifetime event, there might be a slight problem.

As mentioned earlier, if all of your money is in tax-deferred accounts like IRAs and 401k plans then we will have to figure out how to pay the taxes on the $15,000. What is worse, is that the extra $15,000 might push you into a higher tax bracket. Even worse, that extra $15,000 might make your Social Security payments taxable. But, if you can take that money from a Roth IRA, then there are no concerns. Just take the $15,000 and enjoy your daughter's wedding.

Roth IRA and Retirement Planning

The ideal retirement plan is when you can save enough money in your 401(k) plan to provide for your monthly living expenses, including your fun and leisure. Then, max out a Roth IRA every year. Leave that money out of the calculations for generating your montly income. Instead, just let the Roth IRA grow and get money from there when the unexpected happens.

How To Setup a Roth IRA

First, you need to know that there are income limits that limit who can contribute to a Roth IRA. If you are over those limits, then you cannot contribute.

If not, setting up a Roth IRA is easy. If you have a financial advisor, just ask them to set it up for you and you are done. If not, most all brokerages offer IRA accounts. Usually the forms for a Roth IRA and a traditional IRA are the same, because while they are very different for you, they have mostly the same requirements for the brokerage. Fill out the form with your name and SSN. IRA accounts are by definintion individual accounts (Individual Retirement Account), so there is no place to put your spouse's name on your account.


However, IRA accounts do have a beneficiary feature. This is very important. Your IRA can pass to your spouse very easily without a will or any courtroom fuss if you designate them as a beneficiary on the account. Then, all the brokerage firm needs is proof of death and the money transfers nice and easy.

Also, make sure you fill out a contigent beneficiary as well. Spell one out, don't let it be the default (all my living children, or whatever). You can have more than one beneficiary so feel free to split it up. Don't let the form dictate the number of beneficiaries to you. If there are four blanks but you want six beneficiaries, that is not a problem. Attach a sheet or call for instructions.

When you have multiple beneficiaries you'll need to assign percentages to each. Keep in mind that the percentages do not cross between primary and secondary. So, you need your primary beneficiaries to add up to 100% and then you need your secondary beneficiaries to add up to 100%. There is no relation between the two. Don't get complicated with the percentages. If you have 3 children and want to split it equal just use 34%, 33%, 33%. Don't try and do 33.33%. Your children will understand that it is just a math thing and that you did not mean anything by it.

If any of your primary beneificaries is alive, then none of your secondary beneifciaries get anything. This is why it is usually recommended to choose only one person (your spouse) as your primary beneficiary and then everyone else as secondary. Don't get confused.

Primary: Beth 50%, Sam 50%

Secondary: Jason 50%, Donald 50%

If your account is setup like this, then if you die and everyone is alive Beth gets 50% and Sam gets 50%, Jason and Donald get nothing.

If you die and Beth is also deceased, then Sam gets 100% and Jason and Donald get nothing.

The only way Jason or Donald get ANYTHING is if BOTH Beth and Sam are deceased. There is no rollover where if Beth is deceased, then Jason gets her half. This is why it is importanto to keep your beneficiaries up to date. If you want Jason to have Beth's share, you'll need to update your account when Beth dies. The only way you can't make this happen is if you and Beth die together.

Minimum Investment

Enclose a check for the minimum investment. There is no minimum investment for a Roth IRA, but there may be a minimum for whatever you are investing in, or the firm might have a minimum account size. Also, many firms will charge a fee if the account is below a certain amount but not if it is over a certain amount. Find out in advance. Also the form should have an area to do monthly or quarterly automatic investments if you want. If so, make sure the check you write is from the same account as you want the automatic investments to come from because they'll use the information on that check to set it up.

IRA Fees

IRAs are expensive to adminsiter. No matter how much money is in an account there is the same amount of reporting required to the IRS. Some brokerages will charge an annual IRA fee if an account is below a certain amount in order to cover this expense. Be careful here. If there is a $50 annual fee and you invest $1,000 you have to make 5% just to cover the fee. That's a pretty steep hill. If you are starting small make sure the fee is no bigger than $10 and try and find a free one if you can.

Keep in mind that many companies will waive the fee if you have a certain amount of total assets with them. So, if you have a $100,000 account and open a $1,000 Roth IRA they may waive the fee on the IRA.


Once you've opened your Roth IRA, try to max out your contributions every year. There may come a day in the future when you make too much money to contribute to a Roth IRA and you'll want as much money already in as possible. They don't make you "uncontribute" so whatever is in the Roth IRA stays in the Roth IRA. If you are on the fast track, you may just have a few years to contribute to the Roth IRA so get as much in each year as possible.

Remember, you have until April 15 of the next year to put in your contribution, so you have until April 15, 2011 to put money in for 2010. Just make sure and tell your brokerage what you want or they might automatically count them as "current year" contributions.

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