Employer-sponsored retirement plans often match certain amounts that employees elect to contribute. The Thrift Savings Plan (TSP) for federal employees, for example, offers to match up to 5 percent of basic pay.
Suppose your basic pay is $50,000 per year. If you’re eligible, you should elect to contribute at least $2,500 to the TSP (5 percent of $50,000), in order to receive a full match. If you don’t receive a full match, you’re giving up part of your compensation package. If you qualify to contribute to a Roth IRA, that’s where your next retirement contributions should go. Contributions to a Roth IRA are not deductible. However, all withdrawals can be tax-free, after five years and after age 59 1/2.
What’s more, you never have to take distributions from a Roth IRA. If you don’t need to tap a Roth IRA in retirement, the full amount can be passed to your heirs, who can extend the tax-free withdrawals over their life expectancy.
In 2003, the maximum contribution to a Roth IRA is $3,000. Workers who are 50 or older can contribute up to $3,500. Roth IRAs aren’t for everyone, though. If your income exceeds $150,000, on a joint return, you can’t make a maximum Roth IRA contribution. For single filers, this amount is $95,000. (Those with slightly higher incomes can make partial contributions.)
