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program for yourself and didn’t want to use any of the money that was in your job’s retirement plan, or pension, you would want to keep that money separate. By rolling over your retirement plan money, you avoid the mandatory 20-percent tax withholding, as well as con- tinue to enjoy tax-deferred investment growth.

Roth IRAs Roth IRAs are the newest way to save money for retirement in an IRA. They are also the most powerful way. This is because the money that accrues in a Roth IRA is tax free. When you put money into a Roth IRA, you do so on an after-tax basis; you can’t take any type of deduction for it. However, all the interest and other gains that build up the value of your account will not generate any type of taxes. When you begin to take distributions from your account, you will pay no taxes: no taxes on the gains, and no taxes on the money that you originally put in.

Let’s consider Mike Smith. He establishes a Roth IRA for himself and puts $3000 in it. Over the years, he gradually adds to it. Many years pass, and Mike retires and wants to take some money out of the account. He goes through his statements and finds that he has invested $18,000 total (all after tax) of his own money. The account has grown to just more than $73,000. As Mike takes money out of his Roth IRA, he won’t pay any tax on it. And as long as there is still money in the account, it will con- tinue to grow tax free.

The Roth IRA isn’t without its drawbacks, though. First, if you have an annual adjusted gross income of at least $150,000 (married filing jointly) or $95,000 (single filers), you won’t be able to con- tribute the full amount to a Roth. The IRS has phased out contribu- tions to Roth IRAs based on income levels. You won’t be able to make a contribution at all once your income hits the $160,000 (mar- ried filing jointly) or $110,000 (single filers) level. Second, the account must have been open for at least five years, and the individ- ual must be over the age of 591/2 when distributions are made for the tax-free provision to count. That means if you are 57 and establish a Roth IRA for yourself, you must wait until you are at least 62 before you can begin to make withdrawals. Otherwise, it’s taxable.

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