Roth IRA: Possibly the best tax advantaged investment ever

Scott Webb writes: Can you imagine an investment where Uncle Sam doesn’t tax you on your earnings? That is what the Roth IRA can do for you.

If you hold money in a Roth IRA investment for five years or until age 59½, whichever is longer, your principal and your earnings can be withdrawn tax-free.

Withdrawals of earnings made before age 59½ (and if the account is owned less than five years) will be subject to ordinary income tax plus a 10 percent federal tax penalty. Contributions to a Roth IRA are made with after-tax money.

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 age 50 or older, the contribution amount is $6,500 each for 2013.) You can still contribute to your 2013 Roth IRA until April 15, 2014.

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

A little Roth IRAs 101:

If you and your spouse make more than $188,000 a year, there is one way you can convert traditional IRA money into a Roth.

You could start a nondeductible IRA for both of you for tax year 2013. You can then convert your traditional IRA to a Roth with no income limitations. You will have to pay only the tax on the investment earnings.

That conversion could be done in the same week, thus providing a great way for couples older than 50 to stash $13,000 in a Roth IRA.

Married couples who make less than $178,000 a year have a fantastic opportunity right now to put money in Roth IRAs. Single people making less than $112,000 are eligible for a Roth IRA also. Caution: Married couples filing separate might not be eligible.

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

Let’s look at three wealth building examples using a contribution amount of $416 per month for 30 years, total contribution of $150,000. (That is the 2012 Roth IRA contribution limit).

After 30 years, your investment earning a 5 percent rate of return will grow to $347,000. If you earn an 8 percent rate, it will grow to $624,000, and a 9 percent rate will allow your investment of $416 per month to grow to $767,000.

Just imagine what you could do for your family with tax-free money. Remember, those are hypothetical examples. Investment returns and principal will fluctuate based on market conditions and investment decisions.

If you already have a Roth IRA, keep making monthly contributions. If you don’t have one yet, talk with a 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. Begin taking charge of your retirement by starting a Roth IRA.