How to Reduce Your Federal Tax With a Roth IRA
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Determine whether you qualify to make Roth IRA contributions. As of 2013, if you are single and earn less than $112,000 in modified adjusted gross income per year, you can make a full yearly Roth contribution. From that point, your eligibility phases out up to $127,000 per year. At modified adjusted gross incomes higher than that, you cannot contribute to a Roth.
If you are married filing a joint return, the qualifying modified adjusted gross income is $178,000 to make contributions, with the allowable amount phasing out until you are at $188,000 per year.
Open a Roth IRA as soon as you can. If you do not have enough money to make the required initial deposit with a mutual fund company or brokerage, open the account at a bank. Most banks allow you to start an IRA with a savings account, with a very low
Deposit money regularly into your Roth IRA account. As of 2012, you could contribute up to $5,000 per year if you were younger than 50, or $6,000 per year if you were 50 or older, as long as you qualified for the full contribution. The amount increases in 2013 by $500. Consistent savings, starting as young as possible, will ensure maximum growth of your money.
Withdraw money from your Roth at retirement as a qualified distribution. All qualified Roth disbursements are tax-free. If you are age 59 1/2 or older and you have had the Roth account for at least five years, all of the money you withdraw is tax-free, including the investment gains.
Even if you aren't yet 59 1/2, you can withdraw up to $10,000 from a Roth IRA without penalty to purchase your first home, or to pay tuition expenses for your education or a family member's education.Source: finance.zacks.com