Basics
An IRA is an individual retirement account. Individuals purchase the investment tool through a broker, bank or directly from a financial investment company. An IRA is a government-regulated investment tool that allows consumers to plan for retirement by investing in the stock market as part of a larger group of investors. Interest accrues on an IRA in accordance with the fluctuations in the stock market. A Roth IRA follows the same rules as a traditional IRA except in how the contributions and distributions are taxed and when contributions must be taken.
Terms
An IRA must be a designated Roth IRA at the time of purchase, report advisers at the Internal Revenue Service (IRS). Money put into a Roth IRA cannot be deducted from the annual tax return. The funds are taxed along with the rest of the yearly income. Contributions can be made to a Roth IRA after the age of 70-and-a-half, which is the cutoff time when traditional IRAs must be dissolved. A Roth IRA can continue until the death of the account holder, at which time the account can be dissolved and the balance paid out to the beneficiaries.
Limits
A Roth IRA can be set up at any time, but contributions are limited each year. The amount that can be put into an IRA differs from year to year. For example, in 2008, investors could contribute up to $5,000 to a Roth IRA. Investors over the age of 50 could put an additional $1,000 into their accounts that year. The rules change from year to year. The IRS posts rules on its website and financial advisers can provide investors with the necessary information. Anyone with income up to a certain level can open an IRA. The income limits also change occasionally. In 2008, single people, or married people filing separately, could make no more than $101,000 to be eligible for regular contributions to an IRA retirement account.
Payments
Withdrawals from a Roth IRA can be taken after the investor turns 50-and-a-half and the account has been in force for at least five years. Those who take money out of the investment account prior to the qualifying age face penalties as high as 10 percent. Money distributed from a Roth IRA does not have to be reported on a tax return. The taxes have already been paid on the funds. There are special circumstances that can help investors avoid penalties if they need the money. For example, those who become disabled or who have outstanding medical bills can take money out of a Roth IRA without penalty. The rules regarding qualifying withdrawals also may be adjusted annually as part of revised economic stimulus rules.
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