What is a Roth IRA?

A Roth IRA is one of the newest ways to invest your money, but what is a Roth IRA and why should you have one?

According to Wikipedia a Roth IRA is an individual retirement account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, U.S. Senator William V. Roth Jr. of Delaware, a Roth IRA differs in several significant ways from other IRAs.

Established in 1998 (Public Law 105-34), a Roth IRA can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA’s main advantage is its tax structure. Contributions are made only from earned income that has already been taxed (and is not tax deductible), but withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (Self-Directed IRA).

One of the unique features of a Roth IRA is it can be used for certain qualified events without being penalized, such as; the first time purchase of a home or upon becoming disabled. The amount allowed for home buying expenses is $10,000 and your account must be open for five years to qualify. This is a basic overview to the question, “what is a Roth IRA?” A Roth IRA is something that should be part of every financial portfolio.

Roth IRA Contribution Limits

Roth IRA Contribution Limits have been steadily increasing over the years since its inception in 1998. When we say contribution limits, we are referring to the amount that can be deducted on your taxes each year. You will see that this amount increases each you along with the cost of living and inflation rates.

To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. A deemed IRA can be a Roth IRA, but neither a SEP-IRA nor SIMPLE IRA can be designated as a Roth IRA. Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. But, if you satisfy the requirements, qualified distributions (defined in Publication 590) are tax free. Contributions can be made to your Roth IRA after you reach age 70 1/2 and you can leave amounts in your Roth IRA as long as you live.

In the years 1998-2001, the maximum contribution for all contributors was $2,000. In 2002-2004, it was $3,000 and $3,500 for individuals over the age 50. In the year 2005, $4,000 was allowed for people under the age of 50 and $4,500 for individuals over 50. In 2006-2007, $4,000 was the allowable contribution and $5,000 for people over 50. The year 2008, allows $6,000 for people over 50 and $5,000 for people under the age of 50. Starting in 2009, contribution limits will increase in $500 increments based on inflation.

This is a great vehicle for saving money and should be part of everyone’s retirement portfolio. Roth IRA contribution limits will continue to increase over time and hopefully will keep pace with inflation.

Definition of a Roth IRA

The Roth IRA is the newest member of the individual retirement account family. Here is a brief definition of a Roth IRA. It has only been in existence since 1998 and get its name from Senator William V. Roth Jr. A Roth IRA has several unique features.

Roth IRAs can be opened by couples that make up to $159,000 and individuals that make up to $101,000 for a full contribution and this is regardless of whether they have other retirement or pensions plans. One of the best features of a Roth IRA is its tax benefits.

You are able to contribute $5,000 annually and $6,000 if you are over the age of 50.

Contributions to a Roth IRA are not tax-deductible, but they are normally tax-free.

A first-time home buyer can use $10,000 from his account as a tax-free down payment on a home. A first-time home buyer is someone that has not owned a home for 24 months.

A Roth IRA has no required distribution age, unlike other retirement plans.

These are just a few of the features of a Roth IRA. This is a must-have for any financial portfolio. This definition of a Roth IRA should give an idea of how this individual retirement account works.

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