Roth individual retirement accounts (IRA) are designed to help individuals build a financial nest egg for retirement and stay well-funded throughout retirement years. Roth IRAs differ from traditional IRAs because the final earnings are not taxed, and because there are annual limits to how much you can put into your account. But Roth IRAs are also unique in that not everyone is eligible to open and fund an account--there are income limits to control who can take advantage of this investment vehicle.
Institution and Investor
Find an IRS-approved institution to open and manage your Roth IRA. Most financial institutions are acceptable, whether they are banks, brokerage firms, savings and loan associations or credit unions, but you should check to confirm they are approved before investing. There is no minimum age limit that would exclude investors as long as they have earned taxable income with which they can invest.
Income Limits
The Roth IRA is not available to just anyone. An investor must have earned income during the tax year in which she is investing. Furthermore, that investor is not eligible to fund a Roth IRA if her annual income exceeds $114,000 (if she is filing singly) or $166,000 (for married couples filing jointly) as of 2010. If the investor has made a sum of less than $5,000 during that year, she is only allowed to invest as much for that year as she has earned.
Contribution Restrictions and Deadlines
Investors funding a Roth IRA can fund a maximum of $5,000 each year into his account. For each tax year, you have until income taxes are due (usually April 15 of the following year) to fund your Roth IRA retroactively to the preceding year. Any individuals more than 50 years of age are allowed to deposit an additional $1,000 each year for a total of $6,000, an exception referred to as a catch-up clause.
Investment Strategy
Once you have the Roth IRA set up, determine how you will invest your funds. IRA's are often invested into bonds, mutual funds and stocks, among others, depending on the type of investment strategy you want. Many times all types of investments are represented in your account, but the percentages of each type of fund will fluctuate depending on how you want to invest. Conservative investments feature low risks and low rewards, and they often feature primarily mutual funds and bonds. Aggressive investment strategies, on the other hand, feature high risk and equally high reward, and the percentage of your contributions dedicated to the stock market is significantly higher.
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