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Susan Tompor: Roth IRA: Now something for kids and young savers

Detroit Free Press Money section columnist Susan Tompor. (Jessica J. Trevino/Detroit Free Press/TNS)
Detroit Free Press Money section columnist Susan Tompor. (Jessica J. Trevino/Detroit Free Press/TNS) TNS

Tax season is too often a time of four-letter words. But there's a positive one you might want to add to the list: the Roth.

Savers have been able to contribute to a Roth individual retirement account since early 1998, but the rules, and frankly the retirement landscape, have changed significantly since then.

Increasingly, the Roth is turning into a vehicle many can use to save more money -- or save somewhere else -- for retirement. Obviously, there are no one-size-fits-all answers here.

Do you do the Roth? The 401(k)? Or both?

A friend recently wondered if she should open a Roth IRA. She went online to bump up her 401(k) contributions, and the 401(k) website mentioned Roth IRA options. What to do?

Many advisers I spoke with said most people should contribute first to their 401(k) plans in order to snag any matching contributions that the company might offer.

After all, if the 401(k) plan offers 50 cents or $1 for each dollar you put in, up to a set percentage, you grab that money.

Frank Migliazzo, managing director of The Migliazzo Group, Merrill Lynch Private Banking Group in Troy, Mich., said he's told his children who are just beginning their working careers to save in that 401(k) first.

If it's a larger 401(k) plan, many times the fees could be less expensive, too.

Yet "not every employer has a 401(k)," Migliazzo said. And not every employer offers a match.

You could look into a traditional IRA, especially if you meet various limits and would be able to take a tax deduction for a contribution. You can't make regular contributions to a traditional IRA in the year you reach 70½ and thereafter.

Roth IRA contributions aren't tax-deductible. But Migliazzo said many younger consumers could want to set up a systematic plan where they contribute $50 a month or so to a Roth IRA in order to take advantage of the tax-free features of the Roth.

"The big advantage of the Roth is that it's totally tax free -- if the government doesn't change the rules on this," Migliazzo said.

If you pay attention to the rules, you typically do not pay taxes on withdrawals from a Roth IRA in retirement and there are no minimum distributions required from a Roth IRA while the owner is alive.

Under a Roth IRA, a saver can contribute up to $5,500 -- or up to $6,500 if age 50 or older -- in a given year, if one's income falls within certain limits.

Single filers with modified adjusted gross incomes below $131,000 in 2015 can make at least a partial contribution.

Married couples filing jointly can make at least a partial contribution if their modified adjusted gross income is less than $193,000 in 2015.

The phaseout -- which means that only partial contributions can be made -- begins at $116,000 for singles in 2015 and $183,000 for married couples in 2015.

The income limits for the phaseout range go up by $1,000 in 2016.

One can still contribute to a Roth IRA for 2015 by the tax deadline this year of April 18 for most of the country. You're able to open a Roth IRA even if you have a retirement plan at work.

Workers who are 18 and older, not full time students and don't make much money should look into the Retirement Savings Contributions Credit.

Susan Tompor, is the personal finance columnist for the Detroit Free Press.

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