How to Open a Roth IRA Account

If you are reading this article then it is likely that you have chosen or are considering opening a Roth IRA. As you may be aware, the Roth IRA is arguably one of the best investment vehicles for your retirement. The Roth IRA is a different, and advantageous, investment vehicle due to it’s unique taxing structure. Here are the 4 most important and unique advantages to the Roth IRA:

1. Withdraws from Roth IRA’s after age 59.5 are not taxed because you pay your taxes before hand by contributing after tax dollars.
2. Typically, most people increase their total income over time as they get older. Thus, they usually either stay in the same marginal tax bracket or end up at a higher bracket level at retirement. This is why Roth IRAs enable savvy savers at retirement to accumulate more money than even tax-deductible IRA’s.
3. Unlike a traditional IRA, not everyone is eligible to open and contribute to a Roth IRA. For 2008, the Roth contribution limit is $5,000 as long as your income falls below $101,000 if you’re single, and $159,000 if you’re married filing a joint tax return.
4. Also, unlike a traditional IRA, with a Roth you can withdraw your original contribution money at any time for any emergency reason, tax free, and without penalty and you don’t have to replace the funds, unlike a 401K or a traditional IRA. Of course, it’s always best not to withdraw because that stops the compound interest process.

Finding The Best Broker To Open a ROTH IRA Account:

Increasingly more and more young investors choose to start their retirement savings with a Roth IRA. You can open this Roth IRA either with a bank or a broker of your choice. Most banks offer retirement accounts to their customers but their choice of investment vehicles such as CD’s (certificate of deposits), money market accounts, and other savings accounts can be limited with low rates of return. Here are some basic criteria you can take into consideration when deciding which broker to open your Roth IRA account with:

1. Choice Of Investment Options (stocks, bonds, mutual funds, etc) – A Roth account is merely the account type. Within this Roth IRA account you can invest any way you’d like (stocks, bonds even real estate).
2. Low Commission Costs and Account Fees – Depending on market conditions you may want to start wit conservative investments such as index funds or mutual funds. Just be sure to make sure the fee’s are minimal or at least reasonable.
3. Automatic Contribution – If you’re planning to invest on a month to month basis look for a retirement broker that offers the ability to make automated fund transfers into your Roth from your personal bank account.
4. Minimum Balance Requirement – Some brokers may impose a minimum initial investment and balance requirement. For young investors or new investors the minimum requirement may difficult to acquire if the limit is to high. Don’t get discouraged by limits if you only want to start up with a few hundred dollars, there are options available.

- learn more about: Roth ira’s

US workforce cautious about IRA and 401K investments

A study by Hewitt Associates, which administers 401(k) plans for corporations, found the average U.S. 401(k) plan balance was down 14 percent through October to $68,000 from $79,000 in 2007.

This study indicates that the American workforce is cautious about investing in typically “safe zone” areas such as the 401k and IRA. They are shifting their money out of stocks and even reducing their contributions to their IRA, Roth IRA and 401k plans.

Hewitt, a human resources consulting and outsourcing firm, found 4 percent of workers had stopped contributing to their plans in response to the declines on Wall Street, and fewer are investing in stocks.

Hewitt’s analysis included 2.7 million U.S. employees and data collected through October.

The report goes on to state that:

About 71 to 72 percent of eligible U.S. workers contribute to 401(k) plans, down about 2 points since the start of the year, according to Hewitt. On average, they set aside 7.8 percent of their pretax earnings for retirement investments, down slightly from 8 percent in 2007.

Some employers have increased their incentives for the employees to invest, such as increasing their match, and some workers — tempted by lower prices — have increased contributions, she said. However, the proportion of new money dedicated to stocks is at an all-time low, at 58 percent.

Some employees, especially in economically sensitive sectors like retail, have stopped contributing altogether. Also, since the credit crunch has made borrowing more difficult, more employees are also tapping 401(k)s for cash.

Overall, 6 percent of employees pulled money out, up from 5.4 percent a year ago. So-called hardship withdrawls, in which workers have to meet certain criteria but are still liable for penalties and additional taxes, are up 16 percent. Loans, which often come with low interest rates, are a better option, Hess said.

One factor to watch in coming months, according to Hewitt: More employers may need to reduce their 401(k) matches to conserve cash. In 2002, about 5 percent of companies cut back their matching contributions.

full study: http://news.yahoo.com/s/nm/20081124/us_nm/us_hewitt_retirement

SEP IRA 101

SEP IRA

The SEP IRA (Simplified Employee Pension plan) is a variation of the other individual retirement accounts.  Essentially it is a retirement plan designed to benefit self employed individuals and/or small business owners as well as their employees. Since SEP accounts are treated the same as IRA’s funds can be invested the same way as any IRA.

SEP IRA contribution limits

In 2008 a SEP IRA has a contribution limit of $46,000. SEP IRA’s contributions are treated as part of a profit-sharing plan. As an employee, my employer can contribute up to 25% of my wages to my SEP IRA account. For example, if an I earn $40,000 in wages, my employer could contribute up to $10,000 to the SEP IRA account. Contributions to a SEP IRA are generally 100% tax deductible and investment earnings in a SEP IRA grow taxed deferred and, similar to other IRA’s, my withdrawals after age 59 1/2 are taxed as ordinary income. Withdrawals prior to age 59 1/2 may incur a 10% IRS penalty as well as income taxes.

SEP IRA’s have become increasingly popular due to their high annual contribution limits, completely flexible and discretionary nature, as well as their minimal administration. SEP IRA plans can be established by a one person business or by a business owner with employees.

Here is a simple scenario of an SEP IRA (*wikipedia)

If a sole proprietor has $50,000 net earnings from self-employment on Schedule C, then the “1/2 of self-employment tax credit”, $3,532, shown on adjustments to income at the bottom of form 1040, will be deducted from the net earnings and the result is multiplied by 20% to arrive at the maximum SEP deduction, $9,293.

Note that net earnings INCLUDE the proposed deduction for contributions to your own SEP-IRA. In this example, the sole proprietor has therefore $59,293 in net income before his (maximum) SEP-IRA contribution.

SEP IRA for the self-employed (without employees)

The calculation of how much can be contributed to a SEP IRA is determined by whether your business is a corporation (receiving income via W-2) or if you are taxed as a sole proprietorship (receiving profit compensation as personal income). Here are two examples:

For Business owners who receive compensation as W-2 income

An S or C corp, incorporated partnership or LLC electing to be taxed as a corporation pays the business owner a W-2 salary. In this situation, the annual SEP IRA contribution can be between 0% to 25% of the owner’s W-2 salary up to the SEP IRA contribution limit. SEP IRA contributions are generally 100% tax deductible as a business expense.

For Business owners who receive compensation as personal income

When a SEP IRA account is set up for an unincorporated business (ie sole proprietorship, partnership or LLC ) annual contributions are made into your SEP IRA account between 0 to 20% of your net adjusted self employment income or adjusted business profits. The beauty of this SEP IRA is that the contributions are flexible and the percentage of contribution can be changed at any time and may be skipped in a bad year (ie. 2008!).

SEP IRA eligibility conditions:

Employee eligibility conditions may not be any more strict than (i.e. can be less strict):
1) be at least 21 years of age
2) has worked for the employer for at least three of the previous five years, and
3) received at least $500 in compensation for the tax year

*wikipedia

As always consult with certified professionals before opening or transferring investment funds.