Questions About a Roth IRA

Use your Roth IRA to generate tax-free income.

A Roth IRA can be a smart investment, but as a new investor you probably have a lot of questions. Learning as much as you can about a Roth IRA before you invest is a good idea, since these retirement plans are not suitable for all investors.

What Makes a Roth IRA Different?

The most unique feature of the Roth IRA is the availability of tax-free income. The money you put into a Roth has already been taxed, so when you take it out in retirement, you do not have to pay any federal income taxes at all. This tax-free feature makes the Roth an excellent vehicle for younger investors and also for those who expect tax rates to rise in the future.

Who Can Contribute to a Roth?

Roth IRA accounts do have some income restrictions, and if you are over those income limits, you are not eligible to contribute. For 2011, married tax filers can contribute the full amount to their Roth IRA accounts as long as their combined income is less than $169,000. Those couples can make a partial contribution if their income falls between $169,000 and $179,000, but they are not eligible for a Roth contribution if their income is above $179,000. For single tax filers, the limit for the full Roth IRA contribution is $107,000. Single filers who make between $107,000 and $122,000 can make a partial contribution, while those who make more than $122,000 cannot contribute at all.

How Much Can I Contribute?

The Internal Revenue Service sets the contribution limits for Roth IRA accounts, and it reviews those limits each year to determine if they need to be raised. For 2011, you can contribute up to $5,000 to your Roth IRA, plus an extra $1,000 if you are 50 or older. It is important to note that the $5,000 or $6,000 limit applies to all IRA accounts, meaning you cannot contribute $5,000 to a Traditional IRA and another $5,000 to a Roth.

What Can I Invest In?

You can invest your Roth IRA in a wide number of asset classes, from individual stocks and stock mutual funds to government and corporate bonds and international investments. The investment choices you have available are determined in large part by the administrator of your Roth IRA. If you open your Roth IRA with a mutual fund company, you can invest in any of the funds it offers. If you choose a traditional or discount broker to administer your IRA, you can use the funds to buy and sell individual stocks, exchange-traded funds and often mutual fund shares as well.

References

• Internal Revenue Service: Roth IRA
• Internal Revenue Service: 2011 Contribution and Deduction Limits