What is a Roth IRA?

A Roth IRA is a retirement account in which the initial deposits are taxed just like normal income before going into the account. From that point on it is tax free if you follow the simple guideline of not withdrawing money before the age of 59 ½. When you begin to withdraw funds as income during retirement, none of the money is taxed, so you don’t have to worry about high taxes in your future and know exactly how much money you have to live off of. These no-fee Roth IRA accounts can be managed personally, by a bank, or a financial advisor. These accounts can also be held by a single person or a couple, and used as a supplement to other retirement investments or as their sole means of retirement planning.

What are their rules?

The Roth IRA account has strict rules regarding contributions to the account, withdrawal, and the amount of money the account holder makes in a fiscal year. Single or married joint accounts can contribute $5400 as of 2009 but the amount changes with inflation each year. A single individual can qualify for a Roth IRA if he or she makes under $105,000 a year or a married couple can earn up to $150,000 a year. In addition to the normal accounts there is a heavily restricted account where individuals can make up to $120,000 and married couples can earn $176,000 a year. All these figures are as of 2009 and change with normal inflation.

How do you Convert to a Roth IRA?

Converting to a Roth is easy if you qualify using either a local bank or brokerage house. All it takes is going into your local branch and opening an account. If you already have a normal IRA or retirement account at work, a few more steps are necessary but the process is simple and handled by the banking representative. Fill out a few papers and turn them into the bank or brokerage house. One thing to keep in mind is that the transferred money will be taxed if it is moving from a traditional IRA or 401k.

How do They Compare to Traditional IRAs

Traditional IRAs and Roths have the identical purposes but go about their business very differently. Traditionals are not taxed on the front end whereas Roth’s contributions are taxed. Later when it is time of begin making withdrawals from the accounts, Roth’s offer tax free withdrawals, while a traditional IRA is taxed as income. Traditional IRAs enforce a mandatory withdrawal at 70 and half but Roths never require account holders to withdrawal funds.

Related posts

• Forex Trading – Should You Invest? (0)
• What Beginner Investors Should Know About Commodity Mutual Funds (0)
• Tax Free Municipal Bonds Or Taxable Bonds? (1)

The Rule Of Thumb:

The rule of thumb is that bonds go in tax-deferred accounts and more tax-efficient equity funds should go in taxable accounts (assuming you don’t have enough room for both in your 401k).  The reason for this is that taxable bonds have much higher yields than even the most generous high yield municipal bonds.  That said, most investors will eventually hit a point where they simply don’t have enough room in their tax-deferred accounts for the quantity of bonds required to fill out their asset allocation.  Part of this is due to the fact that the longer you invest, the larger your portfolio will naturally become.  But most of it is due to the simple fact that as we grow older, we usually become more conservative and wish to allocate a larger percentage of our portfolio to bonds.

The Taxable-Equivalent Yield Formula:

So you have no choice but to own bonds in a taxable account.  How do you decide which is better, tax free municipal bonds or taxable bonds?  The formula is actually pretty simple.  Note: If you buy municipal bonds from the state you live in (for example California if you live in California, etc), the interest earned on them is also exempt from state income tax, which you should factor into the formula below.

Taxable-Equivalent Yield = municipal bond interest rate / 1 – (federal tax rate)

If the taxable-equivalent yield of a particular muni bond fund is greater than the yield on a comparable taxable bond fund, you are better off owning municipal bonds.  If it’s lower, you’re better off owning taxable bonds even after paying tax on the income.

Related posts

• Roth IRA Benefits Compared to a Traditional IRA (0)
• Who to Trust: Where to Invest Your Money Online (0)
• What Beginner Investors Should Know About Commodity Mutual Funds (0)

This first post will explain the 401k rules that you need to be aware of before borrowing from your account. There’s lots of good points to consider in this article and it’s one that everyone should read before taking such a drastic move.

Ty Coon talks about stock market investing system over at Stock Market Investing Today. In his post, he talks about determining overall market direction and how to start setting up screens to identify stocks for further review.

We all have to start somewhere and Stock Market for Beginners provides insight into the world of the stock market with easy language that a beginner can understand. This site has covered other investing topics like gold investing and forex so as to give a complete investing perspective to a beginner.

If you ever wanted to know more about investing, Saving Cash Tips has a post about how you can learn to invest, and why it’s important. Many folks who lost money in the market over the past couple of years really didn’t know how to invest, and just put money into an account where they expected it to go up forever until retirement. Learning more about investing is a smart idea to protect your financial future.”

If you have, or will soon be leaving your current employer and have invested in the companies 401k plan, you will certainly need to understand the 401k rollover process.

We all dream of early retirement but only some truely make it their reality. At Retire Early Guide you can find posts to help you pay off your mortgage faster, effectively save for retirement, put money away for your children’s eduction and more!

That concludes this edition of The Investing Carnival. We would love to host again in the future. Don’t forget to leave a comment when you visit the sites. Tell them we sent you!

Related posts

• Beginner Investing: Mutual Funds (0)
• Financial Blog Carnivals (1)
• Beginner Investing: Gold (0)

Why Mutual Funds?
The stock market is generally considered the best investment over the long haul, but one of the riskiest, especially if you’re a beginner investing for the first time. No one is guaranteeing your money and the factors that control the price of a stock can be complicated. The pool of billions of dollars from many people’s accounts can support a top notch investing team to make decisions without the hefty price bill of paying for them yourself. Also, a mutual fund is significantly less work than managing your own stock portfolio. Choosing stocks, watching their prices to buy in, watching their prices to know when to get out, and making sure what was a good investment 5 years ago still is can be a full time job in itself. Many people just don’t have the time or inclination to do this properly. If this is you a mutual fund can be an excellent choice.

What to Look For When Buying Your First Mutual Funds?
The first things you want to do when buying a mutual fund, especially your first ones, is make sure they have a long healthy track record. Look for mutual funds that have been around for 20 years or longer. If they haven’t been able to stand the test of time you don’t need them right now. The stock market has averaged around 8-10% per year annual returns. The mutual fund you are looking at should at least have maintained this return over the last 20 years to be in your consideration. Also, look at the worse years the mutual fund has had and see if you can stomach that kind of loss without bailing out.

The second thing you want to look at is the performance of the current portfolio manager; he will be driving the decisions. You mutual fund broker should be able to fish up where this person has worked prior.

The last note of caution is you want to make sure you are well diversified. At least split your investment money into four fund pools. I like small cap, international, blue chip, and commodity.

Related posts

• Zachs Investment Research Free Trial Offer (5)
• Growth Investing Tactics and Strategies (0)
• Beginner Investing Hosts The Investing Carnival (0)