What You Should Know About a Roth IRA

You will soon start hearing more about IRAs as we approach tax season. For individuals who need a tax deduction, an IRA makes a great solution to this problem, although there are limits. Many people max these limits out for maximum deductions and the nice thing about it is that you have up until April the 15th to make the contribution and it can still be used on the previous year’s income tax as a deduction. This is how a traditional IRA differs from a Roth IRA.

There is a lot of information about methods of saving and investing. It seems like they are always coming out with new investment vehicles. That is what a Roth IRA is-a way of saving money. A Roth IRA is an investment plan that has some special features that can not be found in any other type of savings plan. The Roth IRA was introduced in 1997 and was named after Senator William V. Roth, Jr.

The Roth IRA does not allow tax deductions for contributions. There are curtained qualified conditions that will allow you or your beneficiaries to make tax free withdrawals. Another advantage is not having to pay early withdrawal penalties on qualified withdrawals and there is no mandatory distribution after 70 ½.
The big advantage of the Roth IRA is that it is completely tax free, but you must understand that you do not get a tax deduction for your contributions. Your individual situation will determine whether the Roth IRA or the traditional IRA will fit into your savings plan better.

There are certain requirement s you have to meet to be able to contribute to a Roth IRA. If you filed a joint return and your income did not exceed $150,000 or if you are single and your income did not exceed $95,000, you are able to contribute $4,000 annually and $5,000 if you are over the age of 50. The other requirement is that you must have a minimum income of whatever the amount is that you are contributing to your Roth IRA. If your income exceeds the $150,000 joint filing and $95,000 single filing figure, the amount you can contribute is gradually reduced as you approach the $110,000 figure for singles and $160,000 for joint returns.

You also have the ability to convert a traditional IRA to a Roth IRA if you are single or filed jointly with your spouse. You also have to have an adjusted gross income of not more than $100,000. The year of the conversion, you will be responsible for taxes.

Roth IRAs do have special circumstances where the money can be withdrawn early with no early withdrawal consequences. If you are a first time home buyer, you can withdraw $10,000 tax free as a down payment for you home purchase. Tuition expenses can be withdrawn tax free from you Roth IRA along with money to cover catastrophic medical expenses.

There are many advantages to having a Roth IRA. Roth IRAs can be purchased through most reputable personal finance companies. They are a great way to save for retirement or for a child’s college education. A Roth IRA should be part of every portfolio.