Can someone here with knowledge talk to me about the Roth IRA?

[bicentennial_baby]

Hi folks! :hi:

I'm an Econ major, but I'm not a finance person at all, math, theory, etc, but not the markets in much detail.

Ok, so my spouse and I want to start a Roth IRA.

Pros? Cons? Info we should know? Good providers to sign up with?

I'd rather hear from people with experience than links on the internets.

:hi:

[leftofcool]

1. We have been happy with Ameriprise who takes care of ours

So far, we have lost very little with the downturn in the economy, but we expected to lose some.

[DemocratInSoCal]

2. Depends On Your Situation

With a Roth IRA, you don't get a current Income Tax Deduction for your contribution. However, depending upon your income level, and whether you participate in a Pension Plan through work, you might be unable to make a deductible IRA contribution anyways.

Also, there are limitations on joint income, which will determine whether you even are allowed to make a Roth IRA contribution. You could find them easily through a Google search.

But the main thing to consider, is that you pay no tax on the profits generated by the IRA. Whether that's Interest, Dividends or Capital Gains on stocks.

However, you also are not allowed a deduction for losses. So if you invest in a company, and it goes belly up, you not only wouldn't have been able to deduct your initial contribution, but you won't be able to account for the loss.

Assuming the laws don't change, when you withdraw the money upon retirement, you won't have any tax on the distributions, since they were after tax contributions to begin with, and the Roth does not tax any profits.

[Gormy Cuss]

3. Pro: you won't owe taxes on earnings if you don't touch it until retirement age.

Pro: like traditional IRAs, setting aside the money now when you're still young means the investment has a long time to grow.

Con: doesn't reduce your taxes this year.

I assume that you're using TaxCut or TurboTax and have tested the scenario for traditional vs. Roth IRAs. If not, find a worksheet and do so. Since you're still in school a traditional IRA for you may be a way to shave off some tax liability and that may or may not be important to you guys.

I know you can find your own links, but Motley Fool has a good summary of why Roth vs. traditional
http://www.fool.com/ira/ira03.htm

As for a place to stash it, I would caution against stashing it at a big place like Fidelity because one year's worth of contributions is peanuts to them -- better to save that for a few years down the line.

I have Roths and traditionals, and decide each year which way to go. Usually it's a Roth.

[papau]

4. for the well off the Roth is a no brainier - for the rest of us "it depends" - will

your tax bracket drop post retirement ?? - if so the trad. IRA may be a better choice.

Will the money be touch for living expenses within 5 years - again a Trad. IRA may be better.

There are various what if calculators on the internet - have fun :-)

As to providers - there are no "providers" as in giving you a gift - you are the provider and all will want your money in their investment products - giving you the documents for you to sign to get the proper tax treatment in return for the right to shave a bit off the top of your assets each year.

The investment choices are yours - indeed an Etrade account lets you wander among the various mutual funds and other investments so you do not feel locked in.

[A HERETIC I AM]

5. There are some significant advantages of a Roth IRA

Chief among them is, as was stated above, distributions are tax free because Roth's are funded with after tax money. Also, there is no requirement to begin distributions at 70 1/2 years old, as is the case with Traditional IRA's and 401(K) plans, which means this can be the truly "long term money". You can also continue to contribute to a Roth for as long as you wish, provided you have earned income (a paycheck).

As Papau mentioned, there aren't "providers", per se, instead these types of accounts are known as "custodial" accounts in that they have to be set up with a custodian - either a Mutual Fund company, a retail brokerage, a bank, etc. On line brokerages as well as brick-and-mortar retail brokerage's can set one up for you. An IRA agreement document must be signed regardless of what firm you choose. Using a single Mutual Fund company as custodian can limit your investment selections to only the funds they offer, but there are some that offer brokerage services (Vanguard is a good example) which means that even though that company is primarily a Mutual Fund company, they can buy and sell other securities (stocks, bonds, other Mutual Funds) for you as well.

Also as mentioned above, if you are participating in a 401(K) plan at work, you are not allowed to deduct contributions to a Traditional IRA, therefore a Roth is an excellent vehicle for further tax-deferred growth. The downside is the contribution limitation - $5,000 for 2008 ($6,000 if you are over 50 years old) but if you are young, this is not a major concern. The contribution limits will increase in the coming years.

I understand you didn't want any links, but the IRS website is actually fairly easy to navigate and their publications, while tedious to read at times, are very informative. www.irs.gov