Benefits of a Roth IRA(Individual Retirement Account).


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.

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, Business Bank New York




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