Roth IRA
Although it will be a while until you use your retirement savings, knowing what a Roth IRA is and how you can benefit from it will increase your earnings when you get to retirement and benefit your family investment strategy.
A Roth IRA is an individual retirement account with investments usually in the forms of stocks and bonds that is not taxed, assuming certain conditions are met. A Roth IRA allows limited contributions throughout the year that was predetermined when the account was set up. As is the case with all retirement investments, one can only deduct funds from the account (without a penalty tax/fee) after they are 59 ½ years old, and the Roth IRA has been opened for a minimum of five years.
Roth IRA Contribution Limits
There are certain Roth IRA contribution restrictions issued by the federal government that changes annually based on the national averages family income. The income that a Roth IRA pulls from must meet certain requirements; the most important being that the income comes from actual work efforts and compensation in the forms of wages, tips, salaries, bonuses and professional fees. There are also annual limits on how much an individual can make. As of 2010, the limits are:
- $105,000 – for those filing Single, Head of Household, or Married Filing Separately (not having lived with spouse during the year.) For gross adjusted income exceeding $120,000, contributions are no longer allowed.
- $167,000 – for those filing jointly. For gross adjusted incomes in excess of $177,000, contributions are no longer allowed.
- $10,000 – for those filing Married Filing Separately (and have lived with spouse during the year). For gross adjusted incomes exceeding $10,000, contributions are no longer allowed.
Roth IRA limitations tend to change every year. There are certain Roth IRA contribution limits based on your income and the national inflation rate. Some years, if the national economy hasn’t changed much, and you haven’t changed jobs or received any substantial income changes, there is the chance that Roth IRA contribution limits will stay the same. However, there is the chance your contribution limits may change from year to year. In 2010, the Roth IRA retirement savings limits are:
- $5,000 in 2010 if you are married and filing jointly and your modified adjusted gross income is less than $176,000; and
- $5,000 if you file single and your modified adjusted gross income is less than $120,000.
How a Roth IRA differs from a Traditional IRA
What makes a Roth IRA so special? The pretax dollars that are put into your Roth IRA can save you a ton of money when you retire and start using the money. Even with a traditional IRA your money saved is taxed at distribution. What other changes are there?
- You cannot deduct contributions to a Roth IRA
- If you satisfy the requirements, qualified distributions are tax-free
- You can make contributions to your Roth IRA after you reach age 70 ½
- You can leave amounts in your Roth IRA as long as you live
- The account or annuity must be designated as a Roth IRA when it is set up
Obviously, the opposite of these statements are true of traditional IRA accounts. A Roth IRA is a different way to save money for retirement, other than the popular 401k plan account.
