Roth IRAs can be
established at a bank or through a brokerage account. You must designate
that the account is Roth IRA when establishing it. Once a Roth IRA
account has been opened, you can buy assets such as stocks, bonds,
mutual funds, CDs, and other investments for the account.
An investment (like in a Roth IRA) is considered tax-exempt -- that is,
you don't pay taxes on the earnings when you pull the money out of the
account. On the other hand, an investment (like in a Traditional IRA) is
considered tax-deferred because you pay taxes on the money only when you
pull the money out. Some of the specific features of a Roth IRA are
described in the following sections.
Roth IRA Contribution Amounts
You can currently contribute no more than $3,000 to a Roth IRA. The box
below gives you the contribution maximums for future taxable years for
the Roth IRA. The actual amount you can contribute (as opposed to a
general contribution limit of $3,000) will depend on your earned income.
Because the contributions are made with after-tax dollars, there are no
immediate tax benefits However, in the long run, the earnings in the
account are not taxable. IRS Publication 590 is a great guide for all
the rules applicable to investing in IRAs.
ROTH IRA CONTRIBUTION LIMITS
Tax Year Maximum Annual Contribution
2003 $3,000
2004 $3,000
2005 $4,000
2006 $4,000
2007 $5,000
2008 $5,000
2009 Indexed (i.e. adjusted by inflation)
How Long Roth IRA Earnings Can Accumulate
Your Roth IRA earnings can accumulate in the account until you are 59˝
at which time you can withdraw the money (both your contributions and
the earnings in the portfolio) without paying any taxes on it if the
account has been open for 5 years. You don’t have to withdraw your money
at age 59 ˝ — in fact, you can keep contributing to the account until
age 70 ˝, and you can keep the money in the account after that age in
order to earn more on your investments if you’d like.
Roth IRA Early Withdrawal
You can withdraw your Roth IRA contributions (as opposed to the earnings
you’ve made in the account) before you are 59˝ years old without a 10%
tax penalty as long as you have had the account opened for five years.
You will, however, owe taxes on any earnings (as opposed to
contributions) you withdraw before age 59 ˝. Penalty-free withdrawals of
earnings are allowed after the account has been open for five years in a
number of limited instances including purchase of a first home, if you
are disabled or payment is made to a beneficiary or to your estate after
your death. An additional 10 percent penalty is imposed on withdrawals
prior to the expiration of the five year period except in a number of
limited instances including purchase of a first home, paying for major
medical or higher educational expenses or you are disabled.
Related Articles:
Roth IRA Advantages
Roth IRA Basics
Roth IRA FAQ
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