With all of the talk about Social Security disappearing and the government cutting benefits right and left, many Americans are taking advantage of various tax-advantaged retirement accounts to plan for their own retirement income. Roth IRAs are one of the most popular retirement accounts available. Though there are some restrictions on who can contribute, how much and for how long, the majority of Americans will be able to contribute to a Roth IRA as long as they have earned income.
Roth IRAs are often referred to as "tax-free" retirement accounts, but unfortunately for taxpayers, this is not exactly accurate. The money that goes into a Roth IRA is taxed in the year that it is earned, meaning that a contribution to your Roth IRA for 2008 will not reduce your tax burden for 2008.
However, once that money goes into your Roth IRA, it will never be taxed again, nor will any of the earnings from that money (as long as you follow the rules governing withdrawals from your Roth IRA). This provides a distinct tax advantage for people who believe that they will be in a higher tax bracket at retirement than they are currently.
There are strict rules regarding who may contribute to a Roth IRA. The yearly limit on contributions is currently $5,000, although that limit will go up yearly to account for inflation. For single tax filers, anyone with at least $5,000 in earned income (meaning income from a job, not income from investments, prize winnings, etc.) may contribute the full $5,000 to a Roth IRA as long as income does not exceed $101,000. Those with less than $5,000 in earned income may contribute an amount equal to their earned income (for instance, if you had $3,000 in earned income and $50,000 in unearned income, you could contribute only $3,000 to a Roth IRA for that tax year). Those making more between $101,000 and $116,000 are still eligible to contribute, but their contribution limits are lower and are eventually phased out to zero. For couples filing jointly, the same rules apply, but the limits are $159,000 and $169,000.
Although the money in a Roth IRA may not be withdrawn (without penalty) until the IRA owner reaches the age of 70.5, there are no rules regarding the age at which a person must stop contributing to a Roth IRA. As long as you have earned income, you can contribute to a Roth IRA, which makes it a great choice for those who wish to work past traditional retirement age. Also, unlike 401ks and Traditional IRAs, there are no rules regarding mandatory withdrawals from Roth IRAs, which allows Roth money to grow uninterrupted for as long as the owner wishes.
Those who wish to contribute to a Roth IRA should keep in mind that once the contribution deadline for a given tax year has passed, they can no longer contribute for that year, missing a chance to put that year's money in a tax-advantaged account. For example, if you have $5,000 in earned income in 2008 but you miss the deadline for the 2008 Roth contribution (which happens to be April 15, 2009), you have missed your chance to contribute that $5,000. You cannot contribute $10,000 in 2009 to make up for the missed 2008 contribution.