A few weeks ago, I suggested that people move all their current positions and funds in their 401k portfolio to cash or money market funds to protect themselves from the current world economic turmoil. It appears that the situation, economically speaking, has not been getting better and there has been no signs of significant recovery whatsoever. Though the market has moved only a fraction of a percent since August 10 of this year, the roller coaster swings of the market still exists. I still suggest moving your funds to cash or money market while you can.
Although the direction of our economy is uncertain, it’s still wise to start saving for the future. While 401k and traditional IRA accounts are great retirement strategies, Roth IRA is yet another way to start saving for your future.
Roth IRA is very similar to the Traditional counterpart but varies slightly. The biggest difference is how the contributed funds and earned amount are taxed.
- Contributions are not tax deductible – The contributed amounts are post-tax so you will never have to pay tax again. Therefore the earnings on all investments will not be taxed either. All earnings and principal are tax free since you contribute with post tax money.
- Maximum contribution is limited – Depending on the age and how much money you make, the maximum contribution to your Roth IRA is capped at $5,000 for ages 49 and younger and $6,000 for over 50 years of age every year.
- Funds can be used to purchase a variety of investments including stocks, bonds, certificates of deposits, mutual funds, etc.
- Not everyone qualifies – Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
- Penalty Free Withdraws – Principal contributions can be withdrawn any time without penalty. Earnings can be withdrawn but with tax and penalty imposed. (subject to some minimal conditions).
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The ROTH IRA is a great way to save for retirement. It is my second choice (after using the employer 401k/403b). Great tips. It is also important to note that earnings can be withdrawn tax free for a variety of qualified purposes (like 1st time home purchase).
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It is also agreat way to save for a down payment for your first house.
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I moved 50% of my 401K into money market in June of this year before the sell off in the market. Now, I have no clue as to when to get back into mutual funds. This is one big problem when you move to cash. Your unsure on when to move your cash back into funds. As you are uncertain, the market could turn around anytime causing you to miss the right time to get back in. So, just be careful. When should I get back in?
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We don’t have a 401K here in Canada but I definitely would invest in it if I had the option. Why not when your employer can also contribute? It’s free money.
We have a defined benefit pension that our employer matches which really helps with our retirement goals.
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I have a Roth IRA, but I don’t contribute the maxium allowed… I need to change this behavior!
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Great way to save for a home purchase but make sure you watch out for the income limits.
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