Explanation of the Roth IRA
The Roth IRA was established by the Taxpayer Relief Act of 1997. Introduced by the late-Senator William Roth of Delaware, it established new tax benefits that the public could elect to benefit from. It did not replace the Traditional IRA and has become an option with significant merits. Individuals who qualify can convert traditional IRAs into Roth for future tax benefits.
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Definition
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A Roth IRA allows money to grow tax free to be used after age 59 1/2 years. It must be held in the account for 5 years and provides no deductions for contributions.
Roth Vs. Traditional
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Two significant differences in the Traditional and Roth IRAs are as follows: 1) Traditional IRAs give a deduction while Roth doesn't for contributions, and 2) Traditional IRAs grow tax deferred while Roth grows tax free.
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Contribution Limits
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A person may contribute up to $5,000 ($6,000 over age 50 years) of earned income into a Roth. This is an aggregate amount of all Roth contributions.
Income Limits
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To open or contribute to a Roth, a person must earn less than $116,000 in the year of contribution. Couples must earn less than $169,000 jointly.
Home Purchase Option
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Those who have a Roth IRA may elect to take money out of their retirement account without penalty prior to age 59 1/2 years for a first-time home purchase. The total a person can take is $10,000 for this purpose.
Conversion
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A person who meets the income requirements above can convert a Traditional into a Roth. He must add the converted total to his adjusted gross income in the year of conversion.
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