Roth IRA accounts hold a special tax distinction from other IRAs. Money is taxed prior to investing it into a Roth IRA, and the money grows tax-free each year. When the money is eventually taken out of the Roth IRA during retirement, no tax is due -- it was already paid. The Roth IRA account holder can choose to invest the funds in many different asset classes to diversify, match individual risk tolerance and time horizon.
Confirm eligibility to open a Roth IRA. The IRS determines the conditions surrounding Roth IRA eligibility. As of the 2011 tax year, they are:
A person of any age can open and contribute to a Roth IRA.
The maximum contribution you can make for the tax year 2011 is the lesser of your taxable compensation or $5,000. If you are 50 or older, the amount is $6,000.
Adjusted Gross Income limitations for contributing to a Roth IRA in 2011 are:
-- Single filers and head of household can make up to $107,000 to qualify for the full contribution; $107,001 to $122,000 makes you eligible for a partial contribution; you cannot contribute to your Roth IRA if you have an AGI over $122,000.
-- Joint filers, qualified widow(er) can make up to $169,000 for the full contribution; $169,001-$179,000 makes you eligible for a partial contribution; you cannot contribute if you have an AGI over $179,000.
Contributions must be deposited in the Roth IRA by April 15 of the year following the tax year (i.e., contribute by April 15, 2012 for tax year 2011).
Research Roth IRA custodians. There are many financial companies that offer Roth IRA accounts including: local and national banks, which can invest in CD's and many types of mutual funds; mutual fund companies, which can invest in a diversified portfolio of mutual funds; discount and full service brokerages, which can invest in individual stocks, any mutual fund and other types of investments.
Choose and contact your Roth IRA custodians. Cost, convenience and your investment goals should be considered when choosing a custodian to open your Roth IRA. Once you choose a custodian, contact the company. Many Roth IRA companies offer online applications to open and fund the account. If desired, the IRA company can be contacted by phone or online to request an application be sent by regular mail.
Complete your paperwork and fund the Roth IRA. The application to open a Roth IRA is easy and straightforward. Basic information such as contact information, Social Security number and beneficiary names are required.
The Roth IRA can be funded in a variety of ways: one lump sum payment for the entire year, automatic monthly contributions, or payments throughout the year as desired (not to exceed the limits listed in Step 1).
Keep track of your IRA records. Once you open a Roth IRA, you will have the account for many years, maybe even decades. Be sure to file all records and statements to keep track of how much money has been invested each year and overall. Each year you can make contributions and by reviewing the Roth IRA statements, you can see how quickly the account value grows and compounds. Seeing the account value grow is great motivation to keep up with new contributions.
Tips & Warnings
- Stay on top of the IRS changes to contribution limits each year.
- Photo Credit Jupiterimages/liquidlibrary/Getty Images
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