Roth Ira

When you are young and just starting to work, building up a savings plan for your retirement might seem a bit far out. It would seem quite unnatural to be thinking of retirements when here you are just entering the job market. But if you think carefully about it, especially about the benefits that a Roth IRA can give to younger people, you just might be encouraged to set up a retirement fund early in your working life.

You may prefer to participate in the retirement plan offered by your employer. That would be fine, especially if you can foresee yourself working with the same employer over your entire career. It is a rare person who does that these days.

Your option might be to participate in the 401K plan maintained by your employer and if you quit that job, you could rollover your 401K to IRA. After a suitable waiting period but within 60 days, you can convert your 401K IRA to a Roth IRA and start investing in a retirement plan where the earnings are tax-free.

Is it possible to go straight from 401K to Roth IRA instead of having to set up a 401K IRA first? Under the old Roth IRA rules, you were not allowed to rollover a 401K plan from your employer direct to a Roth IRA. Previously, the Roth IRA showed that it was one of the best vehicles for retirement savings, but its restrictions on maximum incomes and contributions limited its impact.

But now, workers no longer have to set up a 401K IRA rollover first - they may now go direct to a 401K Roth IRA. The 401K Roth IRA contains features that are markedly different in their treatment of retirement from the 401K retirement plans. The basic difference is that in 401K Roth IRA, the workers may build up their savings for retirement and expect to get it back after retirement without having to pay taxes on the investment earnings.

Unlike the Roth IRA, too, the 401K Roth IRA does not have any restrictions on income, which used to determine who can contribute (singles with adjusted gross incomes below $110,000 or married with AGIs not over $160,000) and how much they can contribute (maximum of $4,000). In addition, the 401K Roth IRA will follow the contribution schedule authorized under 401K rules. In 2006, the maximum contribution for those below age 50 was $15,000.

Most financial experts are of one voice in saying that 401K Roth IRA is a product that works best to the advantage of young people who are just starting out in their careers. Their income tax brackets are still at low levels, but they have great opportunities for increasing their earnings. The earning potential on their investment is also estimated to be good, and they will realize substantial tax savings when they withdraw the money upon retirement.