Error creating thumbnail
|This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it.|
A Roth IRA is a retirement plan in the US which allows investments to grow without being taxed. Unlike the traditional IRA, the Roth IRA does not offer tax deduction for contributions. However, if certain requirements are met, the Roth IRA allows all investment earnings to be withdrawn tax-free.
Other benefits of these accounts include avoiding the early distribution penalty on certain withdrawals, and eliminating the requirement to take minimum distributions after age of 70½. The maximum contribution to IRA accounts are are limited to $5,000 ($6,000 for people over the age of 50) or total annual income, whichever is lower. In the case of married couples, each spouse is eligible to contribute individually. The account holder can use the money in these accounts to invest in all types of financial securities: such as stocks, bonds and mutual funds.
The Roth IRA named after Senator William Roth who was the legislative sponsor of these accounts under the Taxpayer Relief Act of 1997.
Roth IRAs are managed by custodians. Custodians can be any type of financial institutions which offer IRA accounts. Banks, insurance companies, mutual funds and brokerage firms are all valid IRA custodians. A person can walk into any of these institutions and fill up a form to start an IRA account.
There are two ways to fund a Roth IRA. An investor can start by directly funding the Roth IRA account or by converting parts of a traditional IRA into a Roth IRA. The institution managing the IRA will have details on how to accomplish this.