What is Roth IRA

What is Roth IRA

A Roth IRA is an Individual Retirement Account (IRA) that allows you to contribute money on an after-tax basis and then withdraw your money (and earnings) tax free at a later time.  Because the money you save in your Roth IRA has already been taxed, your withdrawl is tax free.

What is Roth IRA

Roth IRA’s are idea for (1) younger workers, (2) those who believe tax rates will go up in the future (like me), or (3) those expecting to be in a higher tax rate in retirement than they are today.

In 2011, the maximum contribution to a Roth or Traditional IRA is $5,000/year or $6,000/year if 50 years or older.

Roth IRA versus Traditional IRA

A Roth IRA is funded with after-tax contributions so that withdraws in retirement are not taxed.  In contrast, a traditional IRA is funded with pre-tax contributions but then withdraws are taxed at your future tax rate.  The primary difference is whether you want to pay taxes today or pay taxes in the future.  A Roth IRA provides “tax free” growth over time while a Traditional IRA provides “tax deferred” growth.

There are many benefits of Roth IRA.  One is that after five (5) years, you are able to withdraw money penalty and tax free, provided certain circumstances or conditions are met.  (See my article for details on qualified withdraws).

Unlike a Traditional IRS, which requires mandatory withdraws beginning at age 70-1/2, a Roth IRA never needs to be withdrawn and can be transferred to your spouse or children tax free.  You can also continue to make contributions
to your Roth IRA as long as you have employment income whereas a Traditional IRA no longer accepts contributions once you reach age 70-1/2.

1.  A distribution from a Roth IRA is federally tax-free and penalty-free provided
    that the five-year aging requirement has been satisfied and one of the
    following conditions is met: age 59½, suffer a disability, or qualified first
    time home purchase.

2.  For Traditional IRAs, penalty-free withdrawals include but are not limited to:
    qualified higher education expenses; qualified first home purchase (lifetime
    limit of $10,000); certain major medical expenses; certain long-term
    unemployment expenses; disability; or substantially equal periodic payments.

3.  For a Traditional IRA, full deductibility of a contribution for 2011 is available to
    active participants whose 2011 Modified Adjusted Gross Income (MAGI) is $90,000
    or less (joint) and $56,000 or less (single); partial deductibility for MAGI up
    to $110,000 (joint) and $66,000 (single). In addition, full deductibility of a
    contribution is available for working or nonworking spouses who are not covered
    by an employer-sponsored plan whose MAGI is less than $169,000 for 2011;
    partial deductibility for MAGI up to $179,000.

4.  Typically, you must be at least 18 years old to open an IRA with most financial services
    companies or banks.

What is Roth IRA