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A Roth IRA is a great retirement savings vehicle. Money is invested with after tax dollars and grows tax-free. When you withdraw your money in retirement you do not pay taxes. Let’s review income limits, contribution limits, and the easiest way to get started.

Individuals are allowed to invest $5000 in 2008 (if you are over 50, you can add an additional $1000) as long as their adjusted gross income is less than $101,000. The adjusted gross income is shown on line 4 on a 1040EZ tax form, it’s on the bottom of page 1 for a regular 1040 form. If you make between $101,000 and $116,000 the allowed contribution is gradually phased out. Above an adjusted gross income of $116,000 a Roth IRA contribution is not allowed. A married couple can invest $5000 each as long as the combined adjusted gross income is less than $159,000. Above an adjusted gross income of $169,000 the allowed contribution is phased out. If you exceed these income limits then you can invest in a traditional IRA.Starting a Roth IRA is easy.

The easiest investment option for starting your Roth IRA is to use a lifecycle retirement fund.  All that you need to do is identify the year that you want to retire.   For example if you want to retire in 2035, you would invest in a 2035 lifecycle retirement fund.  Lifecycle retirement funds automatically transitions from a high percentage of stock market investments  (typically 80% stocks for young investors) and transition to a balance of 50% stocks and 50% bonds.  Your main job is to add money, the fund automatically takes care of the asset allocation (the mix of stocks and bonds).  Recently most lifecycle funds have added a small percentage of international investments.   

To get started simply contact a low expense no-load mutual fund company (such as Vanguard or Fidelity) by visiting their web site or by telephone.  I like Vanguard and Fidelity because they use low cost index funds in their lifecycle retirement funds.  Vangaurd calls their lifecycle retirement funds Target Retirement Funds and Fidelity call their the Freedom Funds.  

I really like and recommend lifecycle funds for retirement because I think it’s most important for people to get started with retirement savings.  The next most important tasks are increasing the savings rate and then evaluating if you want to take a more proactive role in choosing index and no-load mutual funds.

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