Contributions to Roth Individual Retirement Accounts, unlike traditional IRAs, do not qualify for federal income tax credits. However, the Roth IRA has other advantages over the traditional IRA. Contributions are made with after-tax funds, and withdrawals after the minimum age of 59 1/2 are tax free. Roth IRA owners need never withdraw from the account, unlike traditional IRA owners who face mandatory withdrawals once they reach age 70 1/2.
At the time of publication, taxpayers under the age of 50 may contribute up to $5,000 annually into a Roth IRA, while those 50 and older may contribute an extra $1,000 catch-up contribution for a total of $6,000. Contributors must earn at least that much in compensation. When opening a Roth IRA account, the financial institution must designate it as a Roth at that time.
Not everyone may open a Roth IRA. Income limits apply. For 2011, the Roth IRA adjusted gross income (AGI) limits for single filers is $107,000 or under to make a full contribution, and between $107,000 and $122,000 to make a partial contribution. Single filers with an AGI over $122,000 cannot contribute to a Roth IRA. The AGI limit for married couples filing jointly is $169,000 for full contributions, and between $169,000 and $179,000 for partial contributions. Married couples filing jointly with an AGI of more than $179,000 cannot contribute.
Traditional versus Roth IRA
While traditional IRAs are be deductible, contributions are made with pretax money. Traditional IRA withdrawals are tax-deferred, not tax-free like a Roth IRA. Along with not having mandatory withdrawals, Roth IRA owners may continue to make contributions to the accounts after the age of 70 1/2, as long as there is earned income. Because the owner does not have to make a withdrawal in his lifetime, the Roth IRA can also be an effective estate-planning tool.
Those holding traditional IRAs may be able to convert the holdings into a Roth IRA, as well as rolling over amounts from a qualified retirement plan such as a 401k. Contributions made to a traditional IRA may be reinvested in a Roth IRA within 60 days without penalty. Conversions of earlier contributions from a traditional to a Roth IRA are subject to ordinary income tax on the untaxed amounts.
- Thinkstock Images/Comstock/Getty Images