Explain Roth IRA
For those who are seeking a way to save money for retirement, one option is to open a Roth IRA. A Roth offers the opportunity to accumulate earnings over many years as well as a number of important tax benefits. Roth IRAs are available from financial institutions such as banks and investment firms, and each will have its own requirements for opening an account.
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Identification
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A Roth IRA is a retirement fund that allows you to make contributions up to a predetermined annual limit. Any interest the Roth contributions earns over the years is free from taxation, and the money can be withdrawn free of taxes once an individual reaches age 59 1/2. Money contributed to a Roth can be directed to a variety of investment products of the individual's choosing, such as stocks, bonds, real estate or mutual funds.
Differences
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A Roth IRA differs from a traditional IRA in that Roth contributions are not tax deductible, while some or all contributions made to a traditional IRA may be deductible, depending on the investor's adjusted gross income level for the year. While Roth contributions are not tax deductible, the investor enjoys the advantage of tax-free withdraws upon retirement. Withdrawals from traditional IRA plans at retirement are taxed as ordinary income, although the contributor's tax bracket is often lower when no longer working.
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Limits
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As of 2011, individuals who are under the age of 50 by the end of the year can contribute the lesser of $5,000 or the amount of their taxable income to their Roth IRA. Those who are 50 or older at year's end can contribute the lesser of $6,000 or their taxable income. Contributions can be split between a Roth and traditional IRA, although the total contribution may not exceed the $5,000 or $6,000 threshold. An individual's total allowable IRA contribution can be determined by using IRS Publication 590 (see Resources).
Early Withdrawals
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In some cases, Roth IRA investors can make withdrawals before age 59 1/2 without incurring a penalty. As of 2011, penalty- and tax-free withdrawals of contributions and earnings can be made if they are put toward the purchase of a new home or to help fund a child's education up to certain limits. Investors can also withdraw their contributions (but not the accumulated interest) with no penalties or taxation for any other reason. However, investors will incur a 10 percent penalty on earnings withdrawals and be required to pay taxes on the amount.
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References
Resources
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