Should I Invest in a Roth IRA?

Hi Chuck,
I have about $25,000 in the bank.  I was thinking about putting into a Roth IRA.  Would this be a good place for my money?  I'm 63 now.  Would there be any penalties if I needed to take it out?

~ Gary in San Antonio, TX

Yes, the Roth IRA is a wonderful place to have your money grow in good mutual funds ... and tax free to boot!   Just remember that -- as with any investment -- there are risks associated with investing in the stock market vs a money market savings account or CD.  You'll take more risk, but the potential reward is much bigger.

For example, a $25,000 CD (certificate of deposit) paying an average 4.5% average interest over a ten year period would grow to $39,175 and the earnings would be subject to ordinary income tax.  Meanwhile, that same $25,000 invested in good mutual funds inside the Roth IRA earning an average 9% rate of return over those same ten years would more than double to $61, 284 -- tax free!  You can easily see the obvious benefits of investing a bit more aggressively for your future needs in one of the best retirement planning vehicles we currently have, the Roth IRA.  Celebrate the Roth's ten year anniversary this year by opening one with your name on it!

Since you're over 59 1/2 Gary, you may withdraw both your contributions and any earnings from the Roth account after five years tax and penalty free; if you withdraw the earnings before five years you'll pay a 10% penalty when you remove it.  You can ALWAYS withdraw any money up to the total principal you invested (in this case, $25,000) with no penalty.   For you readers that aren't 59 1/2 yet, you must be at least that age (and the account open at least five years) to withdraw the earnings without penalty.

Now, there are a few contribution guidelines to take into account.  First, since you're over 50, you may contribute $6,000 into the IRA in 2008 ($5,000 as your basic contribution and $1,000 as a "catch-up" contribution for those over 50).  So, that means -- if you're married -- you may deposit $6,000 each into an Roth IRA this year for a total of $12,000.  Therefore, it will take this and next year's contributions to fully transition the CD into the Roth.  Take a vacation with the other $1,000 ...

There is also an income eligiblity requirement.  The amount a single taxpayer can contribute is phased out if your Adjusted Gross Income (AGI) is between $101,000 - $116,000.  For married persons filing jointly, the phase out is between $159,000 - $169,000. 

Finally Gary, always remember you should plan on not touching any money you invest (mutual funds, stocks, bonds, etc) for at least five years to balance out the additional risk you're taking.  Give it time to simmer, and withstand the natural fluctuations in the market.  If you may need the money sooner, put it in either a money market account or CD.  In that case, your short timeframe is not favorable to withstand the market risk. 

Chuck