A roth IRA is an Individual Retirement Account, through which you can invest in securities, usually common stocks or mutual funds. Other investments including derivatives, notes, certificate of deposits and real estate are also possible.
The total contributions allowed per year to a Roth IRA account is limited to $5000 for adults aged 49 and below and $6000 for individuals aged 50 and above. Starting in 2009, contribution limits will increase in $500 increments based on inflation.
Unlike a traditional IRA, when you contribute to Roth IRA, the contribution is not tax-deductible or you are paying tax upfront. Likewise, in contrast to a tradional IRA where you pay income tax on the entire amount of your withdrawal, in a Roth IRA you pay no further taxes on your withdrawal. Of course some restrictions do apply, the restricitons being that at the time of withdrawal, the account must have been opened for 5 years and that the owner's age is at least 59 ½.
What are the advantages of Roth IRA?
1. Traditional retirement accounts allow you to delay paying tax and that helps the account grow faster, but you'll have taxable income later when you withdraw the money. The more the account grows, the more tax you end up paying.In a Roth account, all the money is working for you and your retirement nest egg is completely tax-free.
2. Direct contributions to a Roth IRA may be withdrawn at any time with no tax or penalty, since they have already been taxed. This means that if you contribute $5000 to your IRA account and after one year your account grew to $6000 value (the value of the underlying stocks increased or you got dividents or whatever) you can take your $5000 back anytime without any penalty or tax.
3. If you have maintained your account for 5 years and your age is 59 1/2 or above, you can withdraw your earnings(when $5000 grows to $6000 after one year, $1000 is your earnings and $5000 your contribution) as well as contributons. Unlike a traditional IRA, there are fewer restrictions and requirements for withdrawing your money. The minimum distribution rules that apply to traditional IRAs beginning at age 70½ don't apply to Roth IRAs.
4. Roth IRA is much more simple than the traditional IRA. With a traditional IRA you need to report a deduction on your 1040 form when you make a contribution and on withdrawal you need to report the entire amount as taxable income. However in Roth IRA since you are already paying your taxes, there is nothing to report.
5. You have already taken care of the taxman. This means that you need not worry if the tax rates go up in future.
6. Up to $10,000 in earnings can be withdrawn tax-free if the money is used to acquire a principal residence. This house must be acquired by the Roth IRA owner, their spouse, or their children.
7. If a Roth IRA owner dies, his/her spouse becomes the beneficiary of that Roth IRA while also owning a separate Roth IRA, and the spouse is permitted to combine the two Roth IRAs into a single account without any penalty.
8. You can contribute to Roth IRA even if you contribute to another retirement plan such as 401K.
9. The savings in a Roth IRA account is more beneficial to your children if you have enough wealth to be concerned about the estate tax.The estate tax applies to your total assets at death, including assets held in a traditional IRA or a Roth IRA. When your children or spouse receive a traditional IRA, they'll have to pay income tax on the amounts they withdraw. The value of what you transfer to them is reduced by the amount of the taxes. But if they receive a Roth IRA, they get to keep the amounts they withdraw.
10. Roth actually lets you to shelter more 'real' money.For example when you contribute $10000 towards your retirement income in a Roth account you can withdraw all $10000 whereas in a traditional IRA account you get only $10000 minus the tax.
Monday, September 29, 2008
Thursday, September 18, 2008
Is this the beginning of the end?
I have read a funny story circulating as email in the Indian software Industry. It is the year 2050 and the currency conversion rate is Rs. 1= $1000. There is a long queue in front of the Indian embassy in U.S.A. The software enginers are anxiously waitng for their visa interview.They are perfecting their Hindi and are practising Namasteys. All they want is to settle down in the land of opportunities that is India.
Although it is imagination stretched to a certain limit, I sincerely believe that the day is not far away when people in U.S.A will look outward from the safe coccoon of theirs and see that the world in which they seemed so secure, have changed. The economic crisis that is unravelling before us is proof that all is not well in the financial sector.
The United States of America is the mightiest country in the world. The only serious opponent to it's superpower status was Soviet Union, which disintegratd years ago. The best of the world drifts towards it, attracted by the tremendous opportunities it offers and the open mindedness of its people. Unlike the mighty empires of the past which relied upon their military supremacy alone, the United States reigns because it is an economic superpower too. Unfortunately the sub-prime crisis (in which banks lended recklessly to below average borrowers) has blown out to be a vast scale economic crisis and that power is threatened now.
The crisis has it's roots in the economic growth during the years 2001 to early 2007. The system was flush with liquidity and bankers looking for new avenues to disberse loans started lending to sub-prime borrowers (borrowers whose credit history is below par) for an interest rate higher than the normal lending rate. The loans were then converted in to securities which were then sold to secondary agencies. This in turn provided more liquidity to the original lenders and they lended to more sub-prime borrowers. The governemnt also encouraged it, believing that the young and the poor who otherwise would not be able to buy homes, would be benefitted.
However the bursting of the real estate boom led to a series of defaults as the value of the homes which were the collateral for the home loans went down and the borrowers were no longer motivated to pay back their loans at their higher interest rates. This led to the value of the bonds which were prmarily based on these sub-prime loans come down. This had a cascading
effect and ultimately led to the collapse of bear sterns, one of the world’s largest investment banks and securities trading firm. The crisis has led to Lehman Brothers filing for bankruptcy. Merrill Lynch was bought out by Bank of America of $50 billion.The insurance major AIG (American Insurance Group) is also under severe pressure.
The United States had always been the greatest borrower and spender. The foreign exchange reserves of most of the nations is in dollars and they invested this in the U.S bonds. This has resulted in an increase in the available funds for the average american, but instead of putting these funds to productive uses, they were often squandered away on consumer goods and
luxuries. During the good times the consumers spent every penny they possibly could and borrowed on top of that.The americans has also the highest credit cards debts. Between 1999 and 2004 household debt grew twice as fast as after-tax income. In good times it is a cause of concern but in bad times like these it is disastrous news.
So the big queston is, Is this just a temporary setback and will the economy correct itself? Or are the underlying problems so great that it is simply impossible to correct them and the system itself need to be overhauled? We the proponents of free market reign had always believed that minimal regulations will ensure a thriving economy. Is that the truth? Only time will tell.
Although it is imagination stretched to a certain limit, I sincerely believe that the day is not far away when people in U.S.A will look outward from the safe coccoon of theirs and see that the world in which they seemed so secure, have changed. The economic crisis that is unravelling before us is proof that all is not well in the financial sector.
The United States of America is the mightiest country in the world. The only serious opponent to it's superpower status was Soviet Union, which disintegratd years ago. The best of the world drifts towards it, attracted by the tremendous opportunities it offers and the open mindedness of its people. Unlike the mighty empires of the past which relied upon their military supremacy alone, the United States reigns because it is an economic superpower too. Unfortunately the sub-prime crisis (in which banks lended recklessly to below average borrowers) has blown out to be a vast scale economic crisis and that power is threatened now.
The crisis has it's roots in the economic growth during the years 2001 to early 2007. The system was flush with liquidity and bankers looking for new avenues to disberse loans started lending to sub-prime borrowers (borrowers whose credit history is below par) for an interest rate higher than the normal lending rate. The loans were then converted in to securities which were then sold to secondary agencies. This in turn provided more liquidity to the original lenders and they lended to more sub-prime borrowers. The governemnt also encouraged it, believing that the young and the poor who otherwise would not be able to buy homes, would be benefitted.
However the bursting of the real estate boom led to a series of defaults as the value of the homes which were the collateral for the home loans went down and the borrowers were no longer motivated to pay back their loans at their higher interest rates. This led to the value of the bonds which were prmarily based on these sub-prime loans come down. This had a cascading
effect and ultimately led to the collapse of bear sterns, one of the world’s largest investment banks and securities trading firm. The crisis has led to Lehman Brothers filing for bankruptcy. Merrill Lynch was bought out by Bank of America of $50 billion.The insurance major AIG (American Insurance Group) is also under severe pressure.
The United States had always been the greatest borrower and spender. The foreign exchange reserves of most of the nations is in dollars and they invested this in the U.S bonds. This has resulted in an increase in the available funds for the average american, but instead of putting these funds to productive uses, they were often squandered away on consumer goods and
luxuries. During the good times the consumers spent every penny they possibly could and borrowed on top of that.The americans has also the highest credit cards debts. Between 1999 and 2004 household debt grew twice as fast as after-tax income. In good times it is a cause of concern but in bad times like these it is disastrous news.
So the big queston is, Is this just a temporary setback and will the economy correct itself? Or are the underlying problems so great that it is simply impossible to correct them and the system itself need to be overhauled? We the proponents of free market reign had always believed that minimal regulations will ensure a thriving economy. Is that the truth? Only time will tell.
Subscribe to:
Comments (Atom)