Roth IRA Basics for Women

by financialmom on March 27, 2012

in For Women Only, Retirement

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(Today I am participating in the Roth IRA Movement, put together by an advisor friend of mine, Jeff Rose.  Last I heard, over 140 bloggers are writing today about Roth IRAs, in an effort to spread the word about an excellent investment vehicle.)

The Roth IRA is still one of the best wealth-building vehicles available, for two big reasons:

First, contributions to a Roth IRA are made with after-tax money – meaning you have already paid taxes on your contributions.  Your contributions then grow tax-free, and you should not ever have to pay taxes on your withdrawals, as long as you play by the rules.  However, there is no tax deduction for contributions to a Roth IRA.

Second, there are no requirements to take money out of a Roth IRA, ever.  No RMDs, or Required Minimum Distributions, after age 70 ½.  This means if you never need this money, it could pass directly to your beneficiaries, tax-free.  How great is that?!?

Common Misconceptions

When I am meeting with a new client for the first time, I ask what investments they currently own.  I receive the answer, “I have a Roth IRA,” like the Roth IRA is the investment itself.  When I ask what the Roth IRA is invested in, I get a look of confusion.

Saying a Roth IRA is the investment is like saying your wardrobe is your closet.  Your closet only holds your clothes; it’s not the clothes themselves.  So think of a Roth IRA as the holder of the investment (closet), and the contents are the investment itself (clothes).

The other common misconception that goes along with this – you can only have a certain type of investment in a Roth IRA.  You can have stocks, bonds, mutual funds, or even cash in a Roth IRA.   As a result, a wide range of risk is available to you in the investment, and you can be as conservative or aggressive as you want in your investment choices.

Retirement Tips for Women

It’s no secret that women are particularly vulnerable when it comes to retirement savings.  Many women jump in and out of the workforce, as they juggle raising children with their careers.  This results in lower retirement savings. 

Many women also work in positions that do not offer a company retirement plan.  If your employer does not offer a plan to invest in, it is still your responsibility to save for retirement.  A Roth IRA can be an excellent choice to do this.

Women also need to learn to pay themselves before they pay everyone else.  We are so ingrained as caretakers of our families, that we put everyone and everything else first.  I give you permission: pay your tithe on your income, and then put something away for your retirement, if you already have your emergency fund in place. 

Women often believe they need to save for their children’s college years at the expense of their retirement.  Big mistake.  Take care of yourself first.  I know it sounds selfish, but believe me, your children will thank you when you are not dependent on them in your retirement years. 

Contribution Limits

Contribution limits for a Roth IRA in 2012 are $5000 for under age 50, and $6000 for over age 50.  If you are married, and filing taxes jointly, you will not be able to contribute if your modified adjusted gross income (AGI) is more than $183,000. 

If you are single, and your AGI is more than $125,000, you will not be able to contribute to a Roth IRA.  Other rules apply for married filing separately, and other filing situations.  Please consult your tax advisor for more information on contribution limits, and withdrawals from Roth IRAs.

Start saving early enough in your working years, and you will earn a comfortable retirement the easy way, by benefiting greatly from time and the miracle of compounding.

New Profile Pic 2599R Roth IRA Basics for WomenPamela Otten is CEO of Pamela Otten LLC, a Registered Investment Advisor. She loves to work with women business owners and entrepreneurs, and women in transition due to job change, death, or divorce. Pamela will help you set and reach your financial goals, educate you to understand your investments, and teach you how to do more charitable giving. Pamela is a Endorsed Local Provider (ELP) of Investing for Dave Ramsey (www.daveramsey.com/elp), and a Qualified Kingdom Advisor (www.kingdomadvisors.org), trained and committed to integrating biblical principles with her investment advice.

cc smallest Roth IRA Basics for WomenPhoto Credit – LizMarie_AK

Financial Planning, Investment Advice, and Investment Management provided through Pamela Otten LLC, Registered Investment Advisor.

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{ 2 comments… read them below or add one }

April Storm March 30, 2012 at 11:22 am

So many busy single moms just don’t get around to planning for their financial future properly. Thanks for some great and timely advice!
April Storm´s last [type] ..Defiance and Discipline: The Perils of Single Parenting

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Jenny September 26, 2012 at 11:59 am

Thank you for this article. I followed it from Pinterest as I am about to open a Roth IRA. I like your analogy to a closet – it was very helpful for me to gain a better understanding of what a Roth IRA is.

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