What is a Roth IRA?
Roth IRAs allow your contributions and earnings to grow in a tax-free shelter. When you are ready to take distributions from the plan, the money comes free of income taxes as long as you follow the rules. Of course, the whole transaction doesn’t escape taxes. Unlike traditional IRAs, contributions to Roth IRAs are not deductible from current income tax, which is another major difference between the two plans. Roth IRAs have the same contribution limits as traditional IRAs – up to $4,000 per year through 2007 and $5,000 in 2008. After 2008, the contribution limit will be adjusted for inflation. Taxpayers age 50 and over have a special catch-up period that allows them to add another $1,000 per year. Your contributions and earnings grow in a tax-free account until you begin withdrawals – usually not before age 59½. You can withdraw your contributions at any time without tax or penalty. However, in most cases, the IRS imposes a 10 percent penalty on withdrawal of earnings before the age of
A Roth IRA gives you the ability to set aside money for retirement by making contributions to a savings or investment account. Before you put money into a Roth IRA, you pay taxes on it. Then, if you take the money and any earnings out (called a distribution) for retirement you don’t pay taxes on it – as long as you meet certain requirements. There are limits on how much you can contribute to a Roth IRA that are based on how much money you make (your adjusted gross income).
The Taxpayer Relief Act of 1997 created the Roth IRA. Contributions to a Roth IRA are not deductible and the maximum annual contribution is the lesser of 100% of compensation or $3,000. Non-working spouses may also contribute up to $3,000 to a Roth IRA. For individuals age 50+, contributions may be increased by $500. Taxpayers with joint adjusted gross income under $150,000 (under $95,000 for single taxpayers) may make full Roth IRA contributions. Contributions may be made beyond age 70 and qualified distributions from a Roth IRA are tax-free, subject to IRS limitations. There are no required minimum distributions on Roth IRAs. Holders of existing IRAs may convert to a Roth IRA. To be eligible for conversion, adjusted gross income cannot exceed $100,000 (not counting the income from the conversion). The conversion amount is taxable at ordinary income rates, but the 10% premature distribution penalty tax does not apply.
The Roth is an investment vehicle targeted to retirement expenses, not education. However, the advantage of using it for education is that while your ordinary income tax applies on the investment earnings, the 10% penalty is waived if the distribution is taken to pay for qualified postsecondary educational expenses. Roth accounts do, however, have annual contributions limitations. Visit savingforcollege.com for the most comprehensive college savings overview.
• The Roth IRA is a type of individual retirement account. The principal difference between the Roth and a Traditional IRA is this: while contributions to a Traditional IRA are tax- deductible (except in certain cases) and withdrawals are taxed, contributions to a Roth IRA are taxed, but qualified withdrawals are not taxed. • Any earnings of your Roth IRA are tax-free while they accumulate. • If your Roth IRA has been established for five years, you may take a qualified distribution for one of the following reasons: you are 59½, you are disabled and have provided proof of this, or you are using the funds for the first-time purchase of a home, up to $10,000. • Regardless of your age, you may contribute up to $3,000 a year, depending on your earned income or that of your spouse. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the following contribution limit increases went into effect: 2002-2004 $3,000; 2005-2007 $4,000; 2008 and beyond $5,000, plus potentia
