About Roth IRA Mutual Funds
In 1997, Delaware Senator William Roth championed the development and creation of the Roth IRA, a new individual retirement account that would give Americans a new option for retirement savings. The Roth IRA was established under the Taxpayer Relief Act of 1997. This type of retirement account can include investments in stocks, CDs, derivatives and mutual funds, as well as other money making funds. The Roth IRA Mutual Fund allows retirement investors more flexibility and control when growing their money.
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Benefits
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The main benefit of a Roth IRA mutual fund is that it is tax-deferred. That means that your money grows in value without being assessed taxes on its gains. You can also make tax-free withdrawals from a Roth IRA mutual fund after you reach age 59 ½. So if at age 60 you have an immediate need for cash (and you have held the account for over five years), you can basically treat your Roth IRA account as a regular checking or savings account to withdraw money from without worrying about paying taxes on this income.
Special Exceptions
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There are a few exceptions to the age 59 ½ rule. If disabled, you can withdraw from your Roth IRA mutual fund before age 59 ½. Also if you have to pay for excessive medical expenses (the expense must be greater than 7.5% of your adjusted gross income), need money to pay for a first home, are unemployed and need to make medical insurance premium payments, or need to pay for college then you can make a withdrawal from your Roth IRA mutual fund without a tax penalty.
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Drawbacks
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Compared to other retirement options, the Roth IRA mutual fund does not have many disadvantages. The only thing you need to be aware of is that if you make an unqualified withdrawal you will be charged a 10% penalty and possibly pay additional income tax on the amount you withdrew. It is also important to note that the contributions you make to a Roth IRA can be withdrawn at any time tax free, but it is the earnings or dividends that will be taxed if taken before age 59 ½.
Right Investment
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You must have earned income in order to contribute to a Roth IRA and the amount you are allowed to contribute to the fund each year is based on your adjusted gross income. Your yearly contributions cannot be greater than your income; the current contribution limits are the lesser of $5,000 or 100% of your earned income for single people and $10,000 for people who are married and filing jointly. People over 50 can make additional yearly contributions over that amount to help bring themselves closer to their goals as retirement approaches.
Also, in order to be eligible for a Roth IRA, you have to be within certain income limitations. For example, in 2009, if you are married filing jointly and have over $176,000 in adjusted gross income, you are not eligible for a Roth IRA. (see Resources for the most recent Roth IRA requirements). Generally, if you work or are self-employed and you're looking for a way to grow your money for retirement without paying taxes on the savings, a Roth IRA mutual fund is a great option.
Opening and Maintaining
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When opening this type of retirement account you have to specifically state that it is a Roth IRA and not a standard IRA. After it is established, you then choose the mutual fund that you would like to contribute to with the investment mix that you think is ideal for your needs. You can usually find Roth IRA mutual fund options at your local bank, a broker, insurance company, or by getting recommendations from friends and family. Vanguard and Fidelity offer Roth IRA mutual fund accounts that you can maintain online at little to no cost. You can make trades and change your investment mixes for your Roth IRA account as you see fit.
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