YOU ASK:

What is a Roth IRA?

WE ANSWER:

A Roth IRA is an individual retirement plan providing considerable tax advantages and thus being an excellent addition to one's retirement income. Unlike traditional IRA, wherein earnings are tax-deferred, Roth IRA accumulations are completely tax-free.

Characteristics of a Roth IRA

  • Because the annual contributions to a Roth IRA are subject to tax, the investment can build on a tax-free basis. Roth IRA owners might be exempt from paying income tax on their distributions provided that the following requirements are met:
    • They have held the individual retirement account for a minimum of five years;
    • They are age 59.5 or older;
    • They are disabled;
    • The distribution goes into qualified first-time home-buyer expenses of no more than $10,000;
    • The distribution is paid as a death benefit to a beneficiary upon the death of the individual.
  • Unlike a traditional IRA, Roth IRA contributions can be made even after age 70.5, and the minimum distribution rules after reaching that age do not apply to Roth IRA. Contributions must be made in cash.
  • Traditional IRA maximum contribution rules apply to Roth IRA, as well. Roth IRA holders under age 50 are allowed to contribute a maximum of $5,000 for tax year 2009. Individuals over age 50 are allowed to make additional catch-up contributions to the amount of $1,000.
  • To be eligible for establishing and funding a Roth IRA, you need to have taxable income for the year, which does not exceed a certain amount. Your adjusted gross income (AGI) must be within the following limits:
    • $166,000 for people who are married and apply for a spousal IRA by fling a joint tax return;
    • $105,000 for married individuals who file a separate tax return;
    • $114,000 for single people or married individuals who have not lived with their spouse during the year.
  • A Roth IRA provides a whole range of investment options such as mutual funds, real estate, stocks, bonds, some coins and money market funds. Self-directed Roth IRAs give you the freedom to choose the type of investment. Investments in collectibles such as paintings, antiques, rugs, etc. are not permitted.
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