Suze Orman likes Roth IRAs

I sometimes watch the Suze Orman show and she always brings up that everyone should pretty much just invest in a Roth IRA. She rarely brings up anything about Series I bonds. Could you briefly explain the differences between the two.

Tom's response

First, let me agree with Suze; if you can, you should fully fund a Roth IRA before investing in Savings Bonds.

The major difference between them is that although Savings Bond interest income is tax-deferred, you have to pay the tax someday. What a Roth IRA earns, on the other hand, is income tax-free if your redemptions occur under any of these conditions:

• your age is over 59-1/2
• you are disabled
• you die (your heirs receive the money tax-free)
• you use the funds to buy or build a first home

However, money you put into a Roth IRA has to come from a job or alimony. For example, you can open a Roth IRA for a child, but the child must have wages of some kind. If a child earns $2,000 mowing lawns in the summer, the child is eligible to deposit $2,000 into a Roth IRA.

For 2006, the maximum amount you can put in a Roth IRA is $4,000 if you are less than 50 years old or $5,000 if you are 50 or over. However, not everyone can contribute this much - the maximums are limited not only by the compensation requirement, but also by how high your income is and by how much you put into a regular IRA.

For example, for 2006, the amount you can contribute starts to phase out when modified adjusted gross income reaches $95,000 for a single person or $150,000 for a couple filing a joint return.

The IRS provides complete tax information on Roth IRAs in its Publication 590.

Savings Bonds also have a maximum annual contribution, but the limits are much higher and there are no requirements regarding the source of the funds or your total income.

A final difference between the two is that once you set up a Roth IRA, you still have to decide what you'll invest the money in. With Savings Bonds, Savings Bonds are what you invest your money in.

You can set up a Roth IRA with a bank, mutual fund, or brokerage company. You can invest your Roth funds in a bank CD, stocks, government or corporate bonds, or almost any other investment; however, Savings Bonds cannot be held inside a Roth IRA.