Tips for Investing in a Roth IRA

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Editor’s Note: This is a guest post from Bailey Harris of

A Roth Individual Retirement Account (IRA) is a type of investment account for people who are saving for retirement. Roth IRAs can be indispensable savings tools. If you follow the rules and invest wisely, your money can grow tax-free. Following are some tips for investing in a Roth IRA.

Make Sure You Are Eligible

Not everyone is eligible to contribute to a Roth IRA. Eligibility requirements stipulate that you must have earned income that exceeds or is equal to the amount contributed. In other words, you must earn income from a job and not invest any more than you earn. Limits are also placed on your adjustable gross income. If you are single, your AGI must be below $122,000. If you are married and filing jointly, you and your spouse’s combined AGI must be below $179,000. AGIs must be below $10,000 if you are married and filing separately.

Decide What to Invest In

Roth IRAs are very flexible. You can invest in almost anything, including stocks, bonds, mutual funds, CDs, and real estate. Stocks are often considered the riskiest investment. If you aren’t familiar with the stock market and do not want to work with a broker, you may be better off investing in mutual funds or another low-risk option. Your bank can help you invest in CDs or bonds. A fund manager or company can help you with the mutual funds.

Contribute the Max

The amount of money that you can contribute to a Roth IRA is dependent on your adjusted gross income. The maximum contribution is $5,000 per year for individuals under the age of 50. Those over the age of 50 may contribute as much as $6,000. The maximum contribution is phased-out between the following AGI levels: $107,000 to $122,000 (if you are single), $169,000 to $179,000 (if you are married filing jointly), and $0 to $10,000 (if you are married filing separately.)Contributing the max while you can is smart because the payoff is huge. If you begin investing $5,000 per year when you are only 25 years old and do that for five years straight, that $25,000 has the potential to grow to more than $500,000 by the time you are 65 years old. That money will definitely help fund part of your retirement.

Finding Money to Contribute

Retirement planning can be very overwhelming and even intimidating for first time investors. There are also a number of people who do not even consider it because they feel like they don’t have any extra to invest. The fact of the matter is that any little bit that you can contribute to a Roth IRA is a good thing. You could try setting aside $50 per month to start. Any windfalls you receive, such as a tax refund, can also be invested. You have to begin somewhere–don’t be afraid to start small if you can’t contribute the max.

Watch Your Withdrawals

A Roth IRA is designed to be an investment for retirement, but you can use account funds for other things. For example, you can withdraw up to $10,000 from your Roth IRA to buy your first home. However, your account must be at least five years old or you will suffer tax penalties. You can also withdraw funds to be used for other purposes, but you must be careful that you do not take out more than you have contributed if you do not want to pay taxes and penalties. If you withdraw earnings and not just contributions before the age of 59 1/2, you will have to pay taxes in addition to a 10 percent penalty. Some exceptions do apply to these rules; it is a good idea to consult a tax attorney if you are not sure how your withdrawals may affect your tax obligations.

Avoid Withdrawals If You Can

Although it is nice to be able to withdraw contributions from a Roth IRA, you should try to keep the money in your account so that you have it for retirement. If you give your money time to grow, you will have it when you really need it.

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