If youve got Microsoft Excel (or just about any other popular spreadsheet program) running on your computer, you can use its FV function to forecast the future value of your Roth IRA or Roth 401(k).

The FV function calculates the future value of an investment given its interest rate, the number of payments, the payment, the present value of the investment, and, optionally, the type-of-annuity switch. (More about the type-of-annuity switch a little later.)

The function uses the following syntax:

=FV(rate,nper,pmt,pv,type)

This little pretty complicated, I grant you. But suppose you want to calculate the future value of an individual retirement account thats already got $20,000 in it and to which you are contributing $400-a-month. Further suppose that you want to know the account balanceits future valuein 25 years and that you expect to earn 10% annual interest.

To calculate the future value of the individual retirement account in this case using the FV function, you enter the following into a worksheet cell:

=FV(10%/12,25*12,-400,-20000,0)

The function returns the value 771872.26roughly $772,000 dollars.

A handful of things to note: To convert the 10% annual interest to a monthly interest rate, the formula divides the annual interest rate by 12. Similarly, to convert the 25-year term to a term in months, the formula multiplies 25 by 12.

Also, notice that the monthly payment and initial present values show as negative amounts because they represent cash outflows. And the function returns the future value amount as a positive value because it reflects a cash inflow you ultimately receive.

That 0 at the end of the function is the type-of-annuity switch. If you set the type-of-annuity switch to 1, Excel assumes payments occur at the beginning of the period (month in this case), following the annuity due convention. If you set the annuity switch to 0 or you omit the argument, Excel assumes payments occur at the end of the period following the ordinary annuity convention.

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Larger Roth IRA withdrawals, including some or all of the interest earned in the account will be subject to tax. There is also a loophole for early Roth IRA withdrawals know as the “72(t) exception”. Under current tax law, you can avoid the 10% penalty tax if you take “substantially equal periodic payments.” The Internal Revenue Service 1989 Cumulative Bulletin tells you how to calculate what it considers to be “substantially equal periodic payments”. IRS Revenue Ruling 2002-62 adds additional details and clarifies some issues pertaining to Roth IRA withdrawal early. All of these engrossing volumes are very likely available at your local law library. To take a series of “substantially equal periodic payments” from your IRA without penalty, you must withdraw money at least once a year, and you must keep taking withdrawals for five years or until you reach age 59, whichever is longer. So, a 35-year-old must take withdrawals for twenty-five years, while a 51-year-old must take them for eight-and-a-half years. A 57-year-old would have to take withdrawals for five years, until age 62. Also, you must let a minimum of 5 years plus 1 day elapse from the date of your first SEPP withdrawal before making “unlimited” withdrawals from your IRA, even if you’ve reached age 59 1/2. Otherwise, the IRS will hit you with the 10% penalty and retroactive interest charges. The amount of your withdrawal is calculated based on the balance of your retirement account on December 31 of the preceding year or any date in the current year prior to the first distribution using your age on December 31st of the year in which you make the withdrawal.

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The biggest advantage enjoyed by a Roth IRA account owner is the tax benefits offered by the government on such schemes. A Roth IRA accepts contributions from the income earned in a financial year that has already been taxed and allows federal income tax free withdrawals up to the total assets held in the account by the account owner. Even the earnings on the assets in a Roth IRA are often free of federal income tax. This is in contrast to other IRA schemes where the contributions are made from tax-deductible income but the distribution or withdrawal of funds is considered as taxable income. However, the there is an overall limit on contributions to all IRAs including the Roth IRA in a particular financial year. The total of all the contributions in different IRAs should not exceed that limit. Roth IRAs are considered superior to other IRAs because of the tax-free distributions or withdrawals allowed in this scheme of retirement accounts. This has made Roth IRAs very popular in a short span of time.

Another type of Roth IRA called the Self-Directed IRA even allows investments into non-typical assets such as real estate and other exotic investment avenues that are generally shunned by the traditional IRA schemes. The discretion of deciding about the nature of financial instruments in which IRA assets are invested lies with the account custodian or administrator. He can decide the asset classes to which the IRA funds can be allocated. At a more fundamental level, the type of an IRA account held by an investor is also a major deciding factor about the nature of investments made with the corpus. Since IRAs have a low risk profile, volatile instruments are avoided and this makes the common debt instruments such as the US treasury bonds very popular amongst the IRA investors. Next in class are mutual funds that are again considered stable and less volatile compared to investing in stocks with high volatility. Even in equity stocks, the IRA investments take a long-term view of holding the securities and do not indulge in short-term trading.

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I know what tax bracket I am relegated to at the moment. I know about how much I’m going to pay in taxes on the income I’ve labored to receive about 65% of. I know these things in terms of what a dollar means today and would much rather pay that price now than later when I have no idea what tax bracket I’ll be in or how much money I will actually see of my retirement earnings.

Many point out that the laws regarding the Roth IRA could change between now and then. This is very true. At the same time the laws in regards to the 401 (k) could quite possibly change in time as well. In the art form of complication the IRS could put out next years tax code in Greek and the average citizen would not be able to tell the difference, I for one think they already do this in the ultimate practical joke on the people. Bottom line is I would much rather retain the maximum allowable control over my money when I need that money rather than trying to write off the taxes I will gladly pay today.

Putting the taxes off until a later date is like getting a credit card with 0% interest for 12 months. What they don’t put in the big bold print is that after the one year period or the ‘honeymoon’ so to speak is over that number goes up to well over 20%. At this point in time I have no magic crystal ball that can in anyway indicate what my tax bracket will be nor can it indicate that percentage of taxes I will owe five years from now much less 35 when retirement comes knocking on my door. The peace of mind that goes with not wondering if it will be enough after taxes is well worth the inconvenience of paying taxes on those funds today.

If you’re looking for some even better news, try this on for size. By not paying taxes on the final amount you are actually adding hundreds of thousands of dollars to your income if you invest the full amount allowable over the course of the next 50 years. You will still save a huge amount of money if you only make the maximum investment over the course of the next 30 years. Every year you add to those figures helps wildly of course when it comes to the bottom line but if you are looking for a way to maximize your retirement funds, eliminating the taxes on those funds by and large is the way to go.

PPPPP

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1. I am 72 years young and still working. Can I set up a Roth IRA?

Yes. Unlike a traditional IRA, which does not allow contributions past age 70 1/2, Roth IRAs have no age limitations. You can continue to contribute to your Roth as long as you have compensation.

2. I am married, age 57, file a joint tax return and make $65,000. I am a participant in a 401(k) plan at work and put $5,000 into my own traditional IRA. Can I set up a Roth IRA?

Not in the tax year in question. You already put your regular contribution limit ($4,000) into your traditional IRA along with another $1,000 catch-up contribution which is allowed because you are over age 50. In your case, you have made the maximum IRA contribution. If you put less into your traditional IRA, you could put the difference, up to $5,000, into a Roth IRA.

3. I am single and my modified adjusted gross income for 2006 was $115,000. I have an existing Roth IRA. Can I make a contribution for 2006?

No, you made too much money. For 2006, if your modified adjusted gross income was less than $95,000, you could make a full contribution to your Roth IRA. The rules say if it was more than $110,000, you cannot make any contribution. If it was between $95,000 and $110,000, there is a formula to calculate a partial contribution limit.

If you were married and filed a joint return, you could have made up to $150,000 and made a full Roth IRA contribution. If you were married and your modified adjusted gross income was over $160,000, no contribution would have been possible. For incomes falling between these numbers, a partial contribution determined by a formula could have been made.

Also note the income limits are now indexed; they will be higher in 2007 and beyond.

4. I have an existing traditional IRA and I want to roll it over to a Roth IRA. Is this possible?

It depends on four things: What year it is, how much money you make, your marital status and the type of income tax return you file. If you are talking about a tax year before 2010 and your adjusted gross income exceeds $100,000 or you are married and file a separate return, you cant convert your traditional IRA to a Roth. Period.

After 2009, these limitations don’t apply and you are good to go. Moreover, you can spread the income tax due on the rollover over tax years 2011 and 2012.

5. I am 55 and have had my Roth IRA for 3 years. I just went on disability and need to withdraw a good portion of it. Is the withdrawal taxable? And since I am not 59 1/2 do I have to pay the 10% penalty tax?

Your Roth IRA consists of two elements: your contributions and earnings. You can take out any amount up to your total contributions tax free.

In order for any earnings withdrawal to be tax free, the distribution has to be a qualified distribution. To be qualified, the distribution needs to be made after five taxable years starting with the first Roth contribution.

Then assuming this five year rule is satisfied, you can take out money tax free if you are over age 59 1/2, disabled, or to buy a first home for yourself, your spouse, children or grandchildren ($10,000 maximum). The rules go on to say if you die and your spouse elects to treat your Roth IRA as their own, any distributions would be qualified.

Distributions before age 59 1/2 are subject to a 10% premature penalty tax. However, this tax only applies if the distribution is includable in income. If you take out your contributions, these are not taxed.

In your case, you qualify for one of the exceptions: disability. So there is no 10% penalty tax.

These examples are based on my interpretation of the rules and should not be relied upon as tax advice. The complexities of distributions from any qualified plan or IRA underscore the necessity to consult with a qualified tax professional prior to making any withdrawal.

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The distribution advantages of a Roth IRA extend beyond the death of the IRA owner. But to make sure the spouse and children can benefit, things have to be set up properly. Here is a summary of the Roth IRA distribution rules at death.

Many people do not like the requirement that a traditional IRA must start required minimum distributions (RMDs) at age 70 1/2. Perhaps they don’t need the income yet. Maybe they would just as soon let the IRA continue to grow. In any event, the RMDs are taxable. Depending on the circumstances, they may even make part of Social Security retirement benefits taxable.

RMDs during the life of the Roth IRA owner are not required. If and when income is needed, withdrawals can be made, but there is no IRS requirement.

When the Roth IRA owner dies, RMDs must begin. When they are required to begin and how the distributions are received is a function of several factors.

Your Spouse is the Beneficiary

If your spouse is the sole beneficiary of your Roth IRA, your spouse can make an election to be treated as the owner of your Roth IRA. In this case, RMDs can further be postponed until the spouse’s death.

Note the word sole beneficiary, as this is an area where a mistake could inadvertently be made.

For example, let’s say you named your spouse and your children as beneficiaries. The spouse would be prohibited from making the ownership election and RMDs would be required over the life expectancy of the spouse, thus reducing (the spouse could die before their expectancy) or exhausting the Roth IRA balance altogether. So much for your desire to leave part to the children.

If the Roth IRA owner dies before age 70 1/2, the spouse doesn’t have to start the RMDs until the IRA owner would have reached age 70 1/2. Here is another area where the spouse needs to pay attention. If RMDs are not started when required (or less than the required amount is taken out), the penalty tax is a whopping 50% of the difference between what was required and what was withdrawn.

If your desire is to extend the RMDs all the way to the death of your spouse, here is another heads up. Let’s say you named a trust as the beneficiary of your Roth IRA. Even if your spouse is the sole beneficiary of the trust, the election to have the spouse treat your Roth IRA as their own cannot be made. There technically may be a work-around (a rollover), but why not just set things up right from the start?

A Person Other Than Your Spouse is the Beneficiary

In this case, distributions must be made over the remaining life expectancy of the beneficiary. If there is more than one beneficiary, the life expectancy of the oldest is used. If the beneficiary is a trust with multiple beneficiaries, the oldest beneficiary’s life expectancy is also used.

Another caution: If an entity other than an individual is a beneficiary of an IRA (even if an individual is also a beneficiary), the IRA is treated as having no beneficiary. The distribution requirements for an IRA with no beneficiary are outlined below.

Probably the most common scenario involving a non-person is a charity. If you name a charity as one of the beneficiaries, the distribution rules are different and may be contrary to your desires. The solution is to roll part of your IRA over to a new one and name the charity as the sole beneficiary.

No Beneficiary

Where no beneficiary is elected, the entire distribution must be made over five years. This five year rule would also apply even if there were a beneficiary and the distributions were not started when the rules dictated they must start.

As I hope you can see, there are several ways to make mistakes which would have the distributions occur in a much different manner than your wishes. These examples are my interpretation of the rules and cannot be relied upon for tax advice. I would recommend sitting down with your financial planner, your accountant and an estate planning attorney to make sure everything is set up properly.

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Another advantage is that you can also avoid the early distribution penalties, which you would otherwise have to pay with any other type of withdrawals. The picture, however, is not all that rosy. This is because you dont get a deduction when you contribute to the Roth IRS. But since you already paid the taxes for the money contributed to this account, you dont have to pay any at the time of withdrawal.

You need to meet certain eligibility criteria in order to contribute to the Roth IRA. One basic condition is that you should have earned income. Also, the gross income should be within certain limits, which will depend on your tax-filing status. There is a limit to the amount that you can contribute towards the Roth IRA. For this year, the contribution can be either up to $4,000, or 100% of your earned income, depending on which is less. The time for filing the contributions is from January 1 of every year until the deadline for filing taxes.

Regarding distribution, the contributed money can be withdrawn from the Roth IRA anytime. As already mentioned, the money is both tax-free and penalty-free, if the Roth IRA has been in existence for at least 5 years. The other conditions include that the money can be withdrawn after the person has attained an age of fifty-nine and a half years, or if the person has become disabled. Also, the named beneficiary can withdraw the money after the persons death.

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A Roth IRA is another type of Individual Retirement Account (IRA). With a Roth IRA contributions to the account are not tax deductible, but qualified withdrawals from the account are not taxable either. A qualified distribution from a Roth IRA is a withdrawal made after the taxpayer attains age 59 . Also a Roth IRA is qualified if it is made to a beneficiary after the taxpayers death, made because the tax payer is disabled, or made by a first-time homebuyer to acquire their original residence.

Distributions from a Roth IRA can be made after the owner reaches 70 .
Currently with a Roth IRA there is an income ceiling where you cant invest in a Roth IRA if your single and your adjusted gross income is higher than $95,000, or $150,000. The amount you can contribute to a Roth IRA reaches zero for incomes of $110,000 for single people and $160,000 for those who are married. There are proposals to remove the ceiling.
A new popular trend with a Roth IRA is to take the funds out and invest them into real estate, businesses, tax liens, and more. An IRA called a self directed IRA is created, and an LLC (Limited Liability Company) or a C-Corporation is formed. Once it is setup the funds are available in a checking account and are ready to invest.

Turning an IRA into a self directed IRA is a difficult process and websites like www.ira123.com make this process much simpler by providing solutions so people can quickly get a self directed IRA setup.

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Parents must give serious thought to protecting their family through estate tax planning. While life insurance and trusts should be a part of every plan, Roth IRAs can be a simple tool for passing money to your child on a tax-free basis.

Roth IRA

First, we need a quick summary of the Roth IRA. A Roth IRA is an after-tax retirement vehicle that produces huge tax savings because all tax distributions are tax-free. That statement can a bit confusing, so lets break it down. The downside of a Roth IRA is the fact that contributions are not tax deductible as with traditional IRAs or 401(k)s. The upside of a Roth IRA, however, is that all distributions are tax-free once the person reaches the age of 59. So how can you use a Roth IRA to pass money to your child?

Opening A Roth IRA For Your Child

One of the biggest keys to retirement planning is time. The more years you spend saving money for retirement, the more you should have when that blessed day arrives. Imagine if you had started saving for retirement when you were 16. How much bigger would your retirement nest egg be? What if you purchased Microsoft stock in 1990 and watched it split eight times? Okay, that was painful example if you missed that opportunity. Nonetheless, why not do for your child what you didnt do for yourself?

The fundamental goal of estate planning is to pass as much of your estate as possible to your family on a tax-free basis. You can transfer relatively small amounts of money to your child now. If you have a 16 year-old child with a Roth IRA, you can contribute $4,000 in 2005. That $4,000 is going to grow tax-free for 43 years and be worth quite a bit. A ten percent return would result in the account growing to roughly $200,000 and the full amount would be distributed tax-free. There are other practical advantages to opening a Roth IRA for your child.

As a parent, it is vital that you teach your child the value of money. Opening a Roth IRA gives you the opportunity to sit down and teach your child the value of saving and investing, instead of yelling at them to clean their room. While a parental lecture on the need to save money would typically meet with glassy eyes and yawns, your childs attitude will undoubtedly change when you are talking about their money.

Work and Maturity Issues

Before you rush out to open a Roth IRA for your child, you must determine if your child is eligible to open an account. To open an account, your son or daughter must be working at least part time for an employer that reports their wages to the IRS. Hiring your child to take out the trash each week is not going to cut it, nor will this strategy work for your 5 year-old. Many teenagers, however, have summer jobs that should suffice for IRS consideration. To avoid any trouble, you should consult with your tax advisor.

A more sublime issue concerns the maturity level of your child. Keep in mind that the Roth IRA will be opened in their name. Your son or daughter will have the legal right to do what they will with the account. It is strongly suggested that you clearly explain the consequences of taking money out of the account [taxes, penalties, being cut out of the will, forced to eat healthy food, grounded for life, etc.] but the decision lies with them. As difficult as it is, try to be objective in evaluating how you child will react to knowing the money is sitting in an account. If you have doubts, you should probably investigate other tax saving strategies.

Opening a Roth IRA for your child can be a very effective means of transferring wealth to your child and teaching important life lessons. If your child exercises restraint, your relatively small contribution to their Roth IRA can grow into a sizeable tax-free nest egg.

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Convert To Roth IRA Regardless of Income 2010

2010 may seem like a long way off, but something magical is going to happen then if you prepare for it. The recent legislation extending the Bush tax cuts contains a unique clause regarding the Roth IRA. Specifically, it contains language that makes the Roth IRA available to anyone regardless of their income, but only for one year.

A Roth IRA is a retirement account that offers a lot of advantages. The primary advantage is found in the distributions from the account. Simply put, they are tax free if a couple of requirements are met. First, the distributions must be made after you pass the age of 59 years and six months. Second, you must have owned the Roth IRA for at least five years. If you meet this test, the money is yours free and clear including all the gains you have made from your investments over the years.

The only criticism of Roth IRAs has to do with income caps. Simply put, a person with a modified gross adjusted income of $100,000 or more cannot convert an existing IRA to a Roth. While many people fall below this income cap, those that were just over it certainly have had a beef.

In an effort to extend his tax cuts, the President agreed to a number of oddities in the new tax legislation. One of the strange clauses is a single year cap exemption. In 2010, the income cap of $100,000 will not apply to the Roth IRA. Put in simple terms, you can convert to a Roth in 2010 regardless of how much you make. You can only do it in 2010, not 2009 or 2011.

There appears to be no reason why the politicians would create a one year exemption to the Roth IRA income cap. It certainly seems a bit fishy, but you might as well take advantage of it. While 2010 seems far off in the future, it gives you time to plan any conversion. Remember, if you convert a traditional IRA to a Roth, you must pay taxes on the moved money. If at all possible, you will want to do this with cash you save between now and then. The more money you can cram into a Roth, the better off you will be in the end.

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