About Roth IRAs

The Roth IRA is a specific kind of Individual Retirement Account that can save many long term investors a large amount of money they would otherwise pay in taxes. There are many things you need to know before investing in a Roth IRA. They are not available to all investors and are subject to strict rules and regulations.

The Facts

A Roth IRA allows investors to make non-deductible contributions to an account that grows tax free. Unlike a Traditional IRA, the Roth IRA does not tax qualified distributions. There are income limits that disqualify some investors from opening or contributing to a Roth IRA. There are also limits on the amount you can contribute to a Roth IRA in a tax year. Roth IRAs are more flexible with contributions and distributions than Traditional IRAs. Check with the Internal Revenue Service for current limits and rules concerning the Roth IRA.

History of

The Roth IRA was first offered in 1998. It is named after Senator William Roth of Delaware who was the primary sponsor of legislation that created the Roth IRA. Deposit limits were initially $2000 per year but have been raised many times since then. Check with the IRS for current contribution limits.

Benefits

The primary benefit of the Roth IRA is tax savings. Since qualified withdrawals from a Roth IRA are not taxed, investment growth is essentially tax free. That can be a significant amount of money over a long period of time. Contributions to a Roth IRA are more flexible than a Traditional IRA. Working taxpayers and their nonworking spouses can open a Roth IRA as long as they meet the income requirements. You can also make contributions to a Roth IRA when you are older than 70 1/2 years. A Traditional IRA forbids it and requires that you to start taking distributions at 70 1/2 years. You are not required to take distributions at any age with a Roth IRA.

Features

The disadvantage of the Roth IRA is that there is no tax deduction for your contributions like there is for a Traditional IRA. With a Roth IRA you get your tax break when you withdraw the money years later. If you are older than 59 1/2 years and your Roth IRA has been open at least five years, you can take distributions tax free. Otherwise you will be charged a 10 percent early withdrawal penalty. The IRS makes an exception for higher education expenses, a first time home purchase, certain medical expenses, an IRS tax bill or the death of the account owner.

Effects

The Roth IRA has been immensely popular since its introduction. Millions of investors have chosen to "rollover" their Traditional IRAs to Roth IRAs. When this is done the Traditional IRA is cashed out and taxes levied. Once the taxes are paid the money can be deposited into a Roth IRA. It then grows there until distributions are taken. If they are qualified distributions no taxes will be paid on the growth or the principle.