Roth IRA

RECENT NEWS
Motley Fool  Dec 14  Comment 
This mega backdoor to a Roth allows you to forgo Roth IRA contribution limits and retire even earlier.
DailyFinance  Dec 5  Comment 
Filed under: Retirement, Personal Finance, Retirement Plans, Roth IRA, Tax Laws Alamy December has begun, and the New Year will come before you know it. With all the holiday planning and celebrations that take place this month, taxes and...
Motley Fool  Nov 26  Comment 
The Roth IRA offers you an incredible opportunity to get tax-free income in retirement.
Motley Fool  Nov 25  Comment 
This tax-advantaged retirement account can supercharge your savings -- if you know all the Roth IRA rules you need to follow.
Wall Street Journal  Oct 31  Comment 
After-tax contributions to a workplace 401(k) can be shifted into a tax-free Roth account, the IRS says.
Forbes  Oct 29  Comment 
In a Roth conversion, you take funds out of a traditional pre-tax individual retirement account, pay the federal, state and local income taxes owed and deposit the funds in a Roth IRA, where your savings grow tax free. In retirement, all your...
Motley Fool  Oct 25  Comment 
A new ruling from the IRS will make it easier for 401(k) participants to get around income limits.
SeekingAlpha  Oct 21  Comment 
By Daniel Ward: With the recent pullback in the equity markets this month, now seemed like a great time to write about why everyone should consider getting setup with an IRA right after graduating college and settling down in your first post-grad...
Wall Street Journal  Oct 19  Comment 
It’s cheaper to roll into a Roth IRA, but harder for your heirs to shield it from taxes.
SeekingAlpha  Oct 3  Comment 
By Hard Asset Investments: One of the biggest advantages to a Roth IRA is having numerous investment options to choose from. Unlike a 401(k), where you'll likely need to choose between mutual funds or age-targeted funds, a Roth IRA lets you choose...




RELATED WIKI ARTICLES
 
TOP CONTRIBUTORS

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 However, if certain requirements are met, the Roth IRA allows all investment earnings to be withdrawn tax-free.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.


Eligibility

  • Unlike a traditional IRA, which are not open to minors and persons over the age of 70½, Roth's IRAs have no age limits. An individual can open a Roth IRA anytime as long as he/she funds it through "compensation earnings". Compensation includes all payments from employers, or earnings from self-employed business and partnerships. For the purposes of determining IRA limits, alimony is also treated as compensation
  • A person is eligible to a Roth IRA even if she is participating in a retirement plan sponsored by her employer (such as a 401k and Roth 401k).
  • The maximum contribution is limited to $5000 per year for individuals below the age of 50, and at $6,000 for individuals above 50. However, these limits are reduced for people who earn less than these amount in "compensation", i.e. contributions to the IRA must come from "compensation" earned during the year.
  • In the case of Spousal Roth IRA, an individual can contribute up to the limit as long as his/her spouse earns enough compensation to cross the limit.
  • As of 2008, Roth IRAs are available to individuals whose income (technically, modified adjusted gross income) is below $101,000 (single) and families with a joint income below $159,000 (married filing jointly). As income rises above these levels, the Roth IRA contribution allowance is phased out and eventually eliminated
  • The amount an individual can contribute to a Roth IRA is reduced by two other contributions:
    • Contributions to a traditional IRA (except for rollover contributions)
    • Contributions to a "501(c)(18) plan", which are employee funded pension plans created before June 25, 1959
  • Contribution to SEP IRA or SIMPLE IRA do not reduce the amount one is eligible to contribute to a Roth IRA, unless it is a regular "IRA-type" contribution.

How to Start a Roth IRA

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.

Advantages of Roth IRA

  • Tax Benefit: Roth IRAs do not tax earnings from dividends and capital gains unless it is withdrawn early. For those who are in lower tax brackets than they will be in retirement, the growth of assets in a tax free environment allows the power of compounding interest to have great effect.
  • Withdrawal Ease: An individual can withdraw contributions to a Roth IRA, i.e. money that he or she directly put in, anytime without having to pay any taxes. Withdrawals of earnings are tax-free if the investor is over age 59½ and at least five years have expired since the Roth IRA was established. Otherwise (with limited exceptions) these earnings are taxable and likely to be subject to early withdrawal penalty.
  • No Minimum withdrawal allows estate planning benefits: The Roth IRA does not require distributions (withdrawals) based on age. All other tax-deferred retirement plans, even the Roth 401(k), require withdrawals to begin by April 1 of the calendar year after the owner reaches age 70½. If an investor does not need the money and want to leave it for his heirs, Roth IRA's offer a great way to earn dividends and capital gains tax-free. However, beneficiaries who inherit Roth IRAs are subject to the minimum distribution rules.
  • Protection from Bankruptcy and creditors: Up to $1,000,000 of Roth IRA assets can be exempt from a bankruptcy under the US bankruptcy code. Many states also have laws that prohibit judgments from lawsuits to be satisfied by seizure of IRA assets. However, the protection does not normally apply in the case of divorce, fraud, failure to pay taxes, and deeds of trust.
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki