Roth Ira

In August of 2006, President Bush signed into law the Pension Protection Act, which made permanent the Roth 401(k) plan that had been created in 2001. But, what exactly is this plan? In 1978, Congress wanted to encourage citizens to save money for their retirement. It was thought that if people were given a way to save that also lowered their federal and state taxes, they might use it. The result was the Tax Reform Act. Section 401, paragraph (k) allowed for the creation of tax-deferred savings accounts for workers. The plans eventually took the name "401(k)", for an obvious reason.

401(k) plans have four distinct features. First, you can put up to fifteen percent of your monthly salary (to a maximum of $15,000 annually) into it. Next, your contribution is taken out of your paycheck before taxes are calculated. As such, it is also removed before you ever get your check, meaning before you can even spend it. So, it is rather a painless means of saving for retirement. Third, and this is not true in all circumstances, your employer may match a portion of what you put into the account. And finally, the money gets turned over to a third party who invests the funds in stocks, bonds etc. based on selections you make from a list of available investment options.

With a Roth 401(k), you get no tax deduction for your retirement savings, but all the money that comes out at the end is tax free provided certain rules are followed. First, the recipient must be older than age 59 years and six months. Second, the Roth IRA must have been owned by the retiree for at least five years. Not a bad situation. For most upper income taxpayers, it is a much better deal.

Still, you have to ask yourself: is converting to a Roth the way to go? Is it better than a standard Individual Retirement Account (IRA)? The first step in making that decision is to estimate certain aspects of your life and income. You have to look at the number of years you have left to retirement, what tax rate you are going to be paying when you retire, and a rough estimate of how much you will put into the IRA during your working years. After that, you can go to any of several Roth IRA Calculators that can be found online. They will help you figure out if converting from a standard IRA to a Roth IRA is the right way to go. After entering all the necessary data, the calculator gives a comparison value between the two different accounts. If the Roth IRA has a higher value, then converting to it will be beneficial.