Do it while you're young honey.... (Part Deux)

Where did we leave off? Oh...the sucky things about Roth....

Now because the Roth is so accommodating, there are some rules. But the fact that most of these rules are easy to follow for us young folk is one of the reasons you should "do it while you're young honey...."

• You can only contribute money that counts as earned income. This means if you're in school, you can't use your refund to put into your Roth. However, you can use the money you EARN at your part time job.
• You can only contribute up to $5,000 a year to the Roth. This rule is for 2010 and the government adjusts it for inflation and other things every year, but generally the point is, the gov'ment is not about to let you pour tons and tons of money into this because it has so many great perks.
• Tied to the bullet above, you cannot contribute to a Roth if your income goes above $120,000 (single), or $176,000 (married filing a joint tax return). Now the government starts phasing out how much you can contribute once your income hits $105,000 (single), or $166,000 (married filing a joint return). This means that a single person making $110,000 can contribute something, but their max is below $5,000. But once they make $120,000, they can't contribute ANYTHING. This is another reason to "do it while you're young honey..." For most of us, our incomes won't get to $105k until we're a few years into our careers. I for one have a goal to be making at least 6figs by the time I reach 30. That gives me 5 years to contribute $5,000 a year ($25,000 to just let sit and grow tax free, until retirement...sounds good to me). Speaking of 5 years, I read if I do just that....$5k for 5 years and just let it sit...it would grow to nearly $500k by the time I hit 65. Sounds REAL good to me.
• Lastly...since Roth has so many tax advantages, there is no tax deduction for contributions made like there is for the 401k. However, coming out of college my income was too high for that 401k deduction anyway...so to hell with it.
  

Oh...point of clarification: Contribution vs Earnings. In the earlier bullets I talked about contributions being able to be withdrawn whenever you darn well feel like it without having to pay taxes on the withdrawal. Earnings are able to be withdrawn for certain things...sometimes tax free and sometimes taxable. Contributions are whatever YOU contribute to the Roth. The hard earned money from your pocket.  So for me that $25k I'm going to put in before 30. Earnings are whatever you MAKE off of the money you contribute. The money you get by just watching it grow but that you really didn't earrrrrn. That money will be taxed if you take it out before retirement (and I think there's a 10% penalty on top of that). But whatever earnings you leave until retirement...are YOURS YOURS YOURS tax free AND penalty free. So...do it while you're young honey!