If you haven’t started a Roth IRA yet, you may be missing out on one of the best ways to save for retirement. The great thing about Roth IRAs is that once the money is in it, any profit you make in it is tax free. You do have to pay taxes on the money you put into a Roth IRA at the time you put the money in. If you already have a traditional IRA account, 2010 may be the right year for you to convert the traditional IRA account into a Roth IRA.

What is special about 2010 is that the legislature passed a law that allows you to pay the taxes with your 2011 and 2012 taxes instead of all in the year you converted it. So if you decide your money would be better off in a Roth IRA than a traditional IRA, 2010 would be the year to act since you can spread your tax burden over two years. This change for the year 2010 was enacted in section 512 of the Tax Increase Prevention and Reconciliation Act of 2005, a summary of which can be found at http://www.govtrack.us/congress/bill.xpd?bill=h109-4297&tab=summary.

To find out if a Roth IRA is the best option for you, you can enter your particular financial data into a Roth IRA calculator such as the one found at http://www.statefarm.com/learning/calc/iracalc2.asp. This one gives you the comparison between how much money you will have at retirement in a traditional IRA versus a Roth IRA. From my tests if you are younger than 50 years old, the Roth IRA is the better choice. You should definitely do your own financial analysis though. Your situation may not be average.

So how does a Roth IRA make money? The same way a traditional IRA does. You can invest the money in a Roth IRA as you would otherwise. The difference lies in when you pay the taxes. In a Roth IRA you pay taxes on the money when it goes in. In a traditional IRA you pay income taxes when you take the money out. So in a Roth IRA you never pay taxes on the investment income, in a traditional IRA you do but you get to take a deduction for the money on your taxes the year you put the money in. If you have a long time available and earn huge profits, the Roth IRA is the clear winner.

The Roth IRA adjusted gross income determines how high your contribution for the year may be. This figure changes almost annually. For 2010 the maximum income you may earn without having a lower Roth IRA contribution limit is $105,000 for singles and $167,000 for married couples filing jointly. The annual contribution allowed currently is $5000 for people under 50 years of age and $6000 for people 50 years and older. The money you put into a Roth IRA does have to be earned income.

Since you will obtain the greatest benefit by investing in a Roth IRA early on, this is one of those financial tools you should tell your teenagers about as soon as they have their first paying jobs. They may not have retirement on their minds yet but if you can get them to put some of that money they earn into a Roth IRA now they will be set when it comes time to retire assuming they choose wise investments. What a wonderful time to teach them about investments too! If you want them to know what they are doing in financial matters, the younger they are when they learn, the more time they will have to use those lessons.