The new Roth IRA

Webb Financial Group writes: Can you imagine an investment where Uncle Sam doesn’t tax you on your earnings — ever?

This is what the Roth IRA can do for you. If you keep money in a Roth IRA investment for five years or until age of 59 ½ — which ever is longer — your principal and your earnings are tax free. Withdrawals of earnings made prior to 59 ½ — and if the account is owned less than five years — will be subject to ordinary income tax, plus a 10 percent federal tax penalty.

If you and your spouse combined make less than $178,000 per year, you can each contribute $5,500 into a Roth IRA for tax year 2013. For people 50 or older, the contribution amount is $6,500 each for 2013. You still can contribute to your 2013 Roth IRA until April 15.

If you have investments that are giving you a large 1099 every February, talk with your certified public accountantor financial adviser about how to shelter more of those taxable gains. The Roth IRA is one way you can do this with earned income.

Can some high income earners still contribute to a Roth? Yes, but not directly and there are catches.

If you and your spouse make more than $188,000 per year, there is one way you can convert traditional IRA money into a Roth. You could start a nondeductible traditional IRA for both of you for the tax year of 2013. If you do not have any other IRAs, you can convert your ND IRA to a Roth with no income limits. You only will have to pay the tax on the investment earnings. Send in the conversion paperwork right after you start the ND IRA

Married couples that make less than $188,000 per year have a fantastic opportunity right now to put money in the Roth IRA. Single people making less than $127,000 are eligible for a Roth IRA, too.

This is modified adjusted gross income. Single and joint filers have a $10,000 phase out.

Although we cannot predict the future, we do know tax rates currently are at some of the lowest rates ever. This makes the Roth even more attractive when you consider tax rates most likely will go up in the future. The higher the tax rates, the better “tax-free” is going to be.

Let’s look at these three potential wealth building examples using a contribution amount of $333 per month for 30 years — total contribution of $119,880. After 30 years, your investment getting a 5 percent interest rate will grow to $240,000. If you get a 9 percent rate, it will grow to $567,000, and an 11 percent rate will allow your investment of $333 per month to grow to $1,000,000. Just imagine what you could do for your family with $1,000,000 of tax-free money! Remember this is a hypothetical example. Investment returns and principal will fluctuate based on market conditions.

If you already have a Roth IRA, keep making your monthly contributions. If you don’t have one yet, talk with your financial adviser about setting one up. Most will allow $50 per month through automatic withdrawal.

Even small monthly contributions will add up. Don’t spend your tax refund; invest it in a Roth IRA to help you pursue the goal of retiring earlier. Take charge of your retirement, start a Roth IRA.

This advice is general in nature and is not intended to be specific advice for your individual situation.