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A Roth IRA is a personal savings plan which allows savings for
retirement and offers great tax advantages.
It is similar to other Individual Retirement Account plans in
many ways, however, a few very significant differences make it
the most popular IRA type since it was established in 1997.
Roth IRA greatest features:
1. Even though you contribute to the account with your after-tax
dollars, all withdrawals are tax free if you meet the
following conditions: you are at least 59 and a half and an account
has been in existence for at least five years. In other words,
you will never pay any taxes on earnings that your IRA fund will
generate after turning 59 and a half.
2. There are no mandatory minimum distributions
at age 70 and a half, as in the case of a traditional IRA plan.
This feature allows passing on more savings to your beneficiaries
if you wish to do so.
3. You can withdraw money from your Roth IRA at any
time without paying taxes up to the amount of your contributions.
Dipping into the earnings will have no tax consequences.
4. There is no age limit on contributions.
Every person with earned income, within limits established
by the IRS (in general, your modified adjusted gross
income must be less than $110,000), is eligible to open
a Roth IRA. For this purpose, the IRS considers as earned
income wages, salaries and money made from being self-employed.
Other income is considered passive (dividends, interest, rental
properties etc.) and can not be used to fund a Roth Individual
Retirement Account.
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Contribution limits.
In 2005-2007 the IRA maximum contribution, whether Roth or traditional
is $4000, and $5000 starting in 2008. If you are over 50 years
of age, you can put an additional $500 in 2005, and $1000 starting
in 2006.
Rollovers and conversions.
In most cases, funds from a traditional IRA can be converted
to a Roth IRA. You will have to pay taxes though, and there are
certain eligibility requirements.
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Similarly, money from other retirement plans like a 401K
or 403(b) can sometimes be rolled over to a Roth IRA (first
rolled over to a traditional IRA and then converted to a Roth
IRA). Note that these operations have serious tax implications,
some of which are irreversible, and their complexity calls for
seeking professional tax/financial advice.
Early distributions.
There are certain situations where withdrawing more money than
your original annual contribution is allowed. The IRS defines
qualifying exceptions that allow a withdrawal without paying penalties,
and these may include: medical and educational expenses, being
disabled and buying a first home.
See also: 401k
contribution, 401k
investing, interest
rate
Related topics: FAQ about IRA,
Roth
IRA calculator, Roth
IRA guide
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