The Roth IRA became an investment option with the Tax Relief Act of 1997. It was named for its chief legislative sponsor, Senator William Roth of Delaware. I am amazed at how many people are not familiar with a Roth IRA and what it can do for people. It is a wonderful option particularly for younger investors.

What are the two types of IRAs?

In order to fully understand what a Roth IRA is, you must understand the different types of IRAs. There are two types of IRA accounts that you can use to save for retirement. For both types, you may not contribute more than $5000 ($6000 if you are age 50 or older) and it must be earned income. The first type of IRA is often called a traditional IRA. With this type of IRA, your earnings are tax deferred. Depending on your income, your contributions might be tax-deductable. You can continue contributing to a traditional IRA until you are 70 1/2 and then must start taking it out using a schedule the IRS provides. At that point, you must pay taxes on everything you withdraw. The second type of IRA is known as a Roth IRA. To contribute to a Roth IRA, your modified adjusted gross income and filing status must be taken into consideration. If you can contribute to a Roth IRA, the earnings are tax deferred and are tax-free when you take distributions. Contributions, though, are not tax-deductable. You may continue contributing to a Roth IRA after you are 70 1/2 as long as you have earned income. There is no age where you must take distributions.

When does it make sense to set up and contribute to a Roth IRA?

I think a Roth IRA should be considered a must for people who qualify. If you are working, you might be able to put money into a 401K at work and an additional $5000 into a Roth IRA. When you are younger, this money grows tax deferred like your 401K allowing it to grow over time. Then, when you take it out you do not need to pay taxes on it. At retirement, you might have some tax free accounts and some accounts that you have to pay taxes on. The flexibility will be appreciated when you retire. If you have enough money at retirement, the money in a Roth IRA can be given tax free to your heirs after you die. Also, if the earnings are needed to buy a house or for emergencies while you are alive, money can be taken out without penalty even if you are younger than age 59 1/2. On a regular IRA, you would have to pay a penalty to take out the earnings early.

Converting a traditional IRA to a Roth IRA

A traditional IRA can be converted to a Roth IRA. What this means is that you have to pay all of the income taxes on the money that is converted. After the taxes are paid, the earnings are tax-deferred and then tax-free when you take it out. At this point, you would not have to take out any distributions at a particular age. When the market is low and the value of your IRA is possibly less than what you put in, this might be a good time to convert to a Roth IRA. The hope would be that you pay taxes on a lower amount and that your investments will grow significantly in the future and can be taken out then without paying any additional taxes. There is no limit to how much you can convert from a traditional IRA to a Roth IRA. Thus, peole who earned too much to contribute to a Roth IRA earlier, can still convert their IRA to a Roth IRA. Because you have to pay the taxes when you convert, this is more desirable if you have a smaller traditional IRA. One advantage, after converting from a traditional IRA to a Roth IRA, you can change your mind and recharacterize it back to a traditional IRA. I did this myself after finally understanding the tax implications of converting a larger traditional IRA. The amount I would owe for converting the IRA now, was more than I could handle. I really think that the conversion makes more sense for those who are much younger than I was.

How do you open a Roth IRA?

If you determine that you can invest in a Roth IRA, you can open an account at most financial institutions such as banks and mutual funds. Many companies charge a fee if you have less than a certain amount in your account and some companies charge you every time you add to your account. You determine how much to initially deposit of your earned income and then fill out the application form. You can deposit the entire amount that your are allowed all at once, or you can add something to your account every month or so during the year. You do not have to put in the entire $5000 in a year. That is a maximum, not a minimum.

What investments are good for a Roth IRA?

You can put your investment money into just about anything including stocks and mutual funds. Mutual funds make the most sense for people, but it is up to you. Some consider that you should include in your Roth IRA international stocks, dividend stocks, real estate trusts, precious metals, and commodities. I have put some of my Roth in individual growth stocks since if you get lucky and put money into a stock such as Microsoft and leave it there for years and years, you could do quite well. That hasn’t happened to me yet, but you never know. I have put some of my Roth IRA into various mutual funds that I like as well. I would not put an annuity into a Roth IRA, but you can try whatever works for you or have a financial planner invest your Roth IRA for you. One thing to remember. With the Roth IRA you can buy and sell mutual funds and stocks and not pay any taxes on the gains. On the other side, you can sell mutual funds and stocks and not be able to deduct any losses on your taxes as well.

If you can, get started investing in a Roth IRA and, if you have young people you know, convince them to start a Roth IRA as well.

Analysts are concerned about the real health of the economy the past half and whether or not it can usher another boost for the next half.

Stocks rallied in the later part of 2009 and into the first months of 2010 but got into a slump after issues like the European debt crisis spelled weaker economic health in general.

Financial data from the first half weren’t too good either. Home sales declined. First-quarter GDP had to be revised, and jobs are still an issue despite the boost from the census jobs.

As for the week ahead, a critical report will be the June jobs report to be relased on Friday. Bad jobs data would contribute to the possibility of a “double-dip” recession which will inevitable affect the market.

Source: CNN Money

But what’s this news about them selling their stock? BBC reports that both Page and Brin will be selling 10 million of their shares at today’s prices. The figure amounts to $5.5 billion.

The sale would mean that the co-founders will no longer have majority control of the company as their voting rights will drop from 59% majority to just 48%.

While some people would probably be raising eyebrows because of this move, Google claims that the two are still very much committed with Google.

Still, factoring in CEO Eric Schmidt’s 10% voting power, the three still has things pretty much under control.

Stocks have been good to investors during the latter half of the year. You can always try to earn back your losses but the smart investor would also try exploring the industries that do offer growth.

BusinessWeek offers some projections on which industries you can bank on for 2010. Analyst favor the tobacco industry and the Internet and catalog retail industry.

Also on the must-watch industries are health and tech but the health care reform bill is a key factor whether stocks would soar or drop.

As for the not-so-popular industries according to analysts – leisure equipment and products.

The Dow Jones rose 30 points or 0.3% to close at 10,501.05. The Standard&Poor 500 index closed gaining 8 points or 0.7% at 1,114.11. Tech-heavy Nasdaq ended its run up 22 points or 1% at 2,212.10.

The jump was triggered by Citigroup’s announcement that it will be paying back the bailout money.

The weak dollar also helped buoy shares and stocks of companies that do a lot of business overseas. Exchange rates factor in stocks of such companies.

Source: CNN