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What is a Roth IRA?

How to make sense of a Roth IRA (Individual Retirement Account).

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A Roth IRA (individual retirement account) is one of the most exiting retirement planning opportunities currently available. Tax-free growth is a Roth IRA's most important benefit. Roth IRA considerations include:

Who Should Open a Roth IRA

A Roth IRA is particularly attractive to

  • those not eligible to receive a 401(k) employer matching contribution
  • those able to save more for retirement than the amount that their employer matches
With opportunities for tax-advantaged growth limited, a Roth IRA is a great way to become financially independent by retirement.

How and Where to Open a Roth IRA

You can open a Roth IRA at nearly any bank or brokerage house, either in-person or online. Opening a Roth IRA is a very simple process, typically with help readily available. Often, there are just a few forms for you to complete. Bring your Social Security number with you as well as the Social Security numbers and addresses of any potential beneficiaries of your account.

Earned Income and a Roth IRA

The amount you are permitted to contribute to a Roth IRA is limited to your earned income. Earned income includes wages and self-employment earnings, but does not include interest or dividends. If you are married, your combined contribution limit is restricted to the total of your combined earned income.

Contribution Limits for Roth IRAs

For the year 2008, the most you can contribute to a Roth IRA is $5,000. If you are 50 or over, you may contribute a total of $6,000. If you have earned income, you can contribute to both a traditional IRA and a Roth IRA, but the combination of your contributions cannot exceed $5,000 ($6,000 if 50 or over).

Roth IRA Contribution Deadline

Each Roth IRA contribution relates to a specific calendar year. You can make a contribution from January 1 of that year until the filing deadline of your tax return. Those who wish to make a 2008 Roth IRA contribution can do so from January 1, 2008 until April 15, 2009. You don't have to make the entire $5,000 contribution at once; you can make many smaller contributions, as long as the total contributed does not exceed $5,000.

No Tax Deduction for Roth IRA Contributions

No tax deduction is available for a Roth IRA contribution. (Many individuals receive a tax deduction for their traditional IRA contributions, however.)

Earn Tax-Free Growth from a Roth IRA

The money you contribute to your Roth IRA grows tax-free. You do not have to pay any taxes on the earnings in the account. In fact, you do not even report the income to the IRS. Even in retirement, when you ideally first access your Roth IRA money, you do not owe taxes on the distribution. If you take your Roth IRA money prior to retirement, however, taxes may be due.

Income Limitations and Roth IRAs

Eligibility to contribute to a Roth IRA is restricted by your filing status and modified adjusted gross income. The Roth IRA income limitations change each year.

No Required Distributions from Roth IRAs

Unlike 401(k) plans and traditional IRAs, there is no age at which you must begin to distribute money from your Roth IRA. As a result, Roth IRAs are an excellent tool to pass along wealth to your children or grandchildren.

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