An Overview of Roth IRAs

by Rebecca Lake

Saving for retirement should always be a top priority, and the sooner you get started, the bigger your nest egg will be. If you want to supplement your employer's retirement plan or if you're self-employed, you may consider investing in an IRA. You may choose to open a traditional or Roth IRA, based on your retirement needs. For qualifying taxpayers, the Roth IRA offers several specific advantages over the traditional IRA.

Who May Contribute

To make contributions to a Roth IRA, you must have earned taxable income during the year. Your income must not exceed the limits established by the Internal Revenue Service. For the 2010 tax year, single filers could contribute to a Roth IRA if their modified adjusted gross income was less than $120,000. The income limit increased to $177,000 for joint filers and qualifying widows or widowers. If you're married and file jointly, you can also make contributions to a spousal Roth IRA on behalf of your husband or wife if your taxable income exceeds their earnings and you're within the IRS income limit.

Contribution Limits

The IRS imposes a limit on the amount you may contribute to a Roth IRA annually. For the 2010 tax year, the maximum you could contribute was $5,000. If you're aged 50 or older, the contribution limit increases to $6,000. The actual amount you can contribute is determined by your modified adjusted gross income. For example, single filers with an adjusted gross income of $105,000 or less may contribute the maximum. You may make a reduced contribution if your adjusted gross income is between $105,000 and $120,000. Contributions in excess of the IRS limit are subject to a 6-percent excise tax.

Distributions

Qualified distributions from a Roth IRA are not taxable. There is no tax penalty for withdrawals if your Roth IRA is at least five years old and you are aged 59.5 or older. You can also avoid a tax penalty if you withdraw from your Roth IRA to purchase your first home, to pay for qualified education expenses for yourself or someone else, to pay unreimbursed medical expenses or if you become disabled. Early withdrawals of earnings for any reason other than those permitted by the IRS are subject to regular income tax as well as a 10-percent tax penalty. You may make withdrawals of contributions of earnings only at any time without incurring a tax penalty.

Considerations

Unlike a traditional IRA, you are never required to take a minimum distribution from a Roth IRA. There is also no age limit imposed on how long you may continue making contributions. While the money in your Roth IRA is allowed to grow tax-free, there is no tax deduction for contributions. The IRS allows you to convert funds held in a traditional IRA to a Roth IRA; however, you must pay regular income tax on the distribution.

About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

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