Contributing to a Roth is always a good idea

I am considering taking an early retirement package which would have me retired by July. Can and should I contribute to my Roth? Can I contribute the maximum with only half a year of work? What type of mutual fund would be the best to fund in this climate?

Contributing as much as you can to your retirement plans always makes sense, and retiring mid-year won't necessarily affect that strategy. As long as you have earnings in 2009 you can contribute the lesser of $5,000 ($6,000 if you are age 50 or older) or an amount equal to your earnings. You can even make the contribution after you retire in July, as long as it is made before you file your 2009 income taxes next year.

Roth IRA contributions have a few other restrictions: the amount you can contribute begins to phase out if your income is above $166,000 for joint filer taxpayers or $105,000 for single taxpayers. Contributions are not allowed at all if your income exceeds $176,000 for joint filers and $120,000 for single filers.

Roth IRAs are a wonderful savings vehicle. As long as you are age 59 1/2 or older and your first withdrawal is at least 5 years after your first contribution, all of the interest, dividends and capital gains accrued in the account, in addition to your contributions, come out tax-free. In addition there is no required minimum distribution after age 70 as there is for traditional IRA owners.

If you are able to, you should consider also making the maximum contribution to your company retirement plan before you retire too.

As far as choosing a mutual fund, that is difficult to advise without knowing the rest of your portfolio. Your contributions should be invested in alignment with your other retirement savings, in a diversified portfolio of stocks, bonds and cash. Consult a financial advisor if your portfolio needs a check-up or rebalance before retirement.