How to Build a Roth IRA

by D. Laverne O'Neal

The Roth IRA, the brainchild of Senator William Roth, was created in 1997. Rather than allowing you to deduct contributions, as with a traditional IRA, the Roth provides for tax-free withdrawals. In addition, contributions to a Roth IRA can be withdrawn without penalty at any time. Earnings on those contributions, however, cannot be withdrawn unless they are qualified distributions. Building a Roth IRA involves choosing a provider, deciding on investment options and making regular contributions in accordance with Roth IRA regulations.

1. Choose a Roth IRA provider. Options include banks, savings and loan associations, credit unions, brokerages, and insurance companies, among others. Choosing a brokerage may allow you to be in greater control of your investment choices. For example, a bank may allow you to make a smaller initial contribution than a mutual fund firm. Before making your decision, research your options carefully, especially regarding startup, maintenance or withdrawal fees.

2. Select your investment types. A mutual fund company can offer a broad range of fund types. Consider the amount of risk and the number of years you expect to leave the investment in place. At a brokerage, you might have the opportunity to make specific stock choices and design your own portfolio. Bonds and annuities are also available options.

3. Make contributions in accordance with applicable tax-year limits. As of 2011, the maximum per-year contribution is $5,000. Roth IRA holders 50 years or older can contribute a total of $6,000 per year. The limit is per year, no matter how many Roth or traditional IRA accounts you have. For example, if at age 49, you contribute $2,500 to a traditional IRA, you can contribute no more than $2,500 to a Roth that year.

4. Monitor your investments and adjust your investment choices as retirement draws closer. No matter how carefully you have made your investment selections, staying on top of their progress is key. After all, it is your earned income and your post-retirement lifestyle that are at stake. Depending on your provider, you may be able to modify your choices monthly or quarterly. Although you should avoid being driven by panic, no degree of vigilance is too great when it comes to saving for retirement. As to lowering risk as you age, if, for example, at age 30 you invested 80 percent of your Roth IRA in higher-risk stocks or stock funds, you might consider reducing that percentage at age 50, and opt for a less risky bond fund or annuity choices. Nothing is more disconcerting than building retirement assets over time, only to see them evaporate as high-risk vehicles lose value.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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