An Introduction to Roth IRAs

Roth Individual Retirement Accounts (IRAs) have existed since January 1st, 1998, and was created by the Taxpayer Relief Act of 1997. The original intent was to create an attractive retirement investing option for middle-income Americans, and it continues to be a popular method for saving for retirement. As more and more Americans find that having one source of retirement funds with their employer plus social security to be insufficient resources for their retirement planning, they are turning to other private methods that will be able to make up for any shortfall.

To qualify for a Roth IRA, you must have earned income, and this cannot be greater than $110,000 annually for single earners or $160,000 for couples filing together (or $10,000 for a spouse filing separately). There is no minimum age, so even minors can have Roth IRA accounts. There is no maximum age for making contributions, little restriction on taking your money out, and no mandatory age for starting to receive payments like a traditional IRA, making this a very flexible option. It works well for people of all ages, but young people who prefer long-term tax free investment growth to short term tax savings have a strong incentive to use this investment tool.

Although the contributions you make to a Roth IRA are not tax deductible, they do grow tax free. The funds in your Roth IRA account can be used to purchase a number of different types of investments, including stocks, mutual funds, bonds, etc. There is a specific contribution limit per year depending on your age. For 2006 and 2007, for example, the limit is $4,000 for the year for everyone age 49 and below, and $5,000 ($4,000 plus $1,000 "catch-up") for those 50 and above. In 2008 the limit will go up $1,000

for each group, and after that it will be raised according to inflation. If you do not contribute to your Roth IRA this year, you can still only contribute the annual maximum next year, so it is usually advantageous to make the maximum contribution each year that you can. If you already have a traditional IRA, you may be eligible to convert those funds into a Roth IRA. This takes a fair amount of analysis, however, because the way these two different types of IRAs are taxed is quite different. In essence, a tradition IRA is taxed when you take your money out, because initial contributions are tax deductible. Roth IRAs, on the other hand, are not taxed when you withdraw your funds, because initial contributions are not tax deductible. You have to do your own calculation with a financial planner to make the best decision; it is always best to know all of your choices and then select the best one when you have gathered all pertinent information.

With the maximum contribution to Roth IRAs increasing year after year, this tax-friendly retirement investment vehicle has never been a
better option.