Mar 30 2011

What is a Roth IRA?

Category: Finance

Answer:

Roth IRAA Roth IRA is a type of retirement/ investment account that gives individuals the opportunity, each year, to deposit after tax earnings up to certain contribution limits. This particular type of retirement account is popular and unique because when the funds are available (certain distribution rules apply), the principal and earnings can be withdrawn tax free. Unlike a traditional IRA, where taxes are deferred on the front end, the Roth IRA gives the majority of its tax benefits on the back end. Funds held in a Roth IRA, like a traditional IRA, can be invested in a variety of different ways according to the individuals risk/return requirements.

Roth IRA Contribution Limits

As of 2011 (for 2010 contributions), the Roth IRA can only be contributed to if you are single with income up to $107,000 (per year) or married with income up to $169,000 (per year). If these requirements are met, you will be able to contribute a maximum of $5,000 (under 50 yrs old) or $6,000 (over 50 yrs old). This amount is limited to the combined contributions of a Roth IRA and Traditional IRA.

Roth IRA Advantages

  • No mandatory distribution age.
  • All earnings and principal can be withdrawn tax free (when requirements are met).
  • Contributions can be invested according to individual preference.
  • Principal contributions can be withdrawn without penalty (some limitations).
  • Converted Roth IRA contributions can be used after 5 years (qualified distributions).
  • May elect beneficiaries and pass account to heirs.
  • Has a higher “effective” contribution limit than a traditional IRA.

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