Home » How to Contribute to a ROTH IRA with your Tax Refund

How to Contribute to a ROTH IRA with your Tax Refund

Establishing a ROTH IRA to contribute to every year does not have to be difficult, and if you are a DIY’er everything can be set up online without you even going to bank. Before you begin to figure out how you are going to get the money, consider using your personal federal tax refund as a contribution to get you started. Keep in mind this strategy can only be used by individuals who will receive a refund. So if you’re serious about contributing to a ROTH IRA, any person can get started in four easy steps.

1) What is a ROTH IRA
If you do not know the specifics of a Roth IRA, let me discuss the features in details.

Contribution Limits - A ROTH IRA is a tax free retirement investment, which allows an individual to contribute a maximum contribution limit of $5,000 for 2012 tax filing season; and if you are over the age of 50 you can add an additional $1,000 making your contribution in total $6,000.
Contribution Eligibility – A person can be any age as long as the person is receiving taxable compensation that includes children who are earning income.
Tax Advantages – Contributions that are made during the accumulation phase are tax free income at retirement. An individual cannot take a tax deduction on their tax return for any contributions.
Other features – There are no RMD (Required Minimum Distributions) which mean a person is not force by the IRS to begin distributing the income at 70 1/2. Distributions are always tax free as long as the funds are aged for 5 yrs and you are 59 1/2 years old.

2) Setting up an account

Setting up the ROTH IRA account does not have to be intimidating; here are the most important things to look for when opening an online brokerage account online.
• Account minimums to get started online – what is the upfront deposit
• Fee & expenses associated with the account – how much do they charge for each transaction
• Investment selection – where can you invest your funds, stocks, mutual funds, EFT
• Reputable provider – is the online servicer’s members of SIPC®, which is the Securities Investor Protection Corporation or FINRA, Financial Industry Regulatory Authority.

3) Online Servicers

There are many online brokerage account servicers that offer no fees or low fees to set up an account. Here is a list of the most recognizable online account servicers.
ING/Sharebuilder
Scottrade
E*Trade
Schwab
TD Ameritrade
Fidelity

4) Time to Contribute

Once you have done your research on the ROTH IRA, decided how your funds will be invested and picked an account servicer to establish your account. On your federal tax return at the bottom of the form which is line 74, that is the area where you would include the information on your ROTH IRA account to begin contributions . If you are not sure the of the ROTH IRA details, such as example routing and account number, you can contact the online servicer to provide you with that pertinent information. Keep in mind if you’re using multiple accounts you can include those on tax form 8888, this will allow you to split your contribution to as many accounts that you deemed necessary.

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8 Responses to “How to Contribute to a ROTH IRA with your Tax Refund”

  1. After reading this post, I’m sure that a newbie with limited or no knowledge of the Roth IRA will surely have a full understand what it is, and how to get started with one. Great post!

  2. […] Money Mentor writes How to Contribute to a ROTH IRA with your Tax Refund – Contributing to a ROTH IRA using your tax refund. April 9th, 2012 | Tags: carnival of […]

  3. avatar ShortRoadTo says:

    Good post. A lot of good information. One thing I would like to add. Many companies will allow Roth investors to invest monthly, such as $100 or $200 per month, into the Roth. Newbies sometimes think they have to put the $5000 in to start a Roth.

    • avatar Lorillia says:

      Yes that’s a good point, but I was writing from the standpoint of using your tax refund to get started. But monthly contributions will work as well.

  4. […] Money Mentor writes How to Contribute to a ROTH IRA with your Tax Refund – Contributing to a ROTH IRA using your tax […]

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    Cool sites…

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  6. avatar NuView IRA says:

    Great idea to use your federal tax refund to get started contributing to your IRA – I love that!

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