Contribution
A Roth Investment Retirement Account is a means to earn money for retirement that is tax-free, thereby allowing the retiree to save more. Named for the senator who created the plan, Senator William Roth, the Roth IRA legislation was part of the Taxpayer Relief Act and was designed to offer retirees an option that would allow you to withdraw funds in a tax-free manner. A Roth IRA has income limits that are based on adjusted gross income, meaning that you can lower your reported income based on certain expenses and donations (such as those to philanthropic organizations) in order to contribute to the Roth IRA. These adjusted gross income limits vary annually. For 2009, the limits were less than $166,000 for a married couple and less than $105,000 for single individuals. While there are some variations that may reduce the amount you can contribute, yet still make more money, as a general rule you must have an income below a certain level in order to contribute.
If you qualify for a Roth IRA, you can contribute money up to a certain limit. In 2009, the limits were $5,000 if you are younger than age 50 or $6,000 if you are age 50 and older. The money contributed to this fund is taxed prior to contribution. As an additional note, the funds must be from earned income, meaning that you must be working in order to contribute.
Maturation
Contributors can continue to add money to a Roth IRA, and all earnings from these contributions become tax-free. In order to withdraw this money without penalty, you must contribute for at least five taxable years (meaning the money truly is for after-tax dollars) and be 59 1/2 years old. The money can be withdrawn prior to this date, but a 10 percent penalty may be levied. Exceptions to this rule may include education expenses, medical expenses and funds for first-time home buyers. These are considered hardship requests and must first be approved by the IRS.
Additional Benefits and Differences From Traditional IRA
In addition to no taxation on earnings, a Roth IRA allows the owner to withdraw funds earlier than a traditional IRA (age 59 1/2 compared to age 70, respectively). Additionally, a Roth IRA does not have any withdrawal requirements once you reach the required age and contribution years. Comparatively, a traditional IRA requires you to regularly withdraw funds at pre-determined intervals. Finally, you can often withdraw your principal contributions (but not earnings from the fund) at most any time, and that withdrawal is tax-free because you have already paid taxes on the funds.
Member Comments