Note: (Updated on 8th January, 2013)I have tried to make this the most comprehensive single article on Roth IRA. After reading this article you will know what is a Roth IRA? Is Roth IRA right for you? Where to open an account? How much you can contribute and how does it compare with other retirement saving plans. If you have any questions, please leave in the comments. Our team of active reader will help you out.
Roth IRA Basics
Roth IRA is type of retirement plan (IRA – Individual Retirement Arrangement) which an individual can use to save for retirement. Roth IRA differs in many ways from other retirement plan like Traditional IRA and 401K.
Roth vs. Traditional IRA
Unlike Traditional IRA, you do not get tax deduction on contributions you make to a Roth IRA account. However, all (qualified) withdrawals are tax free. This includes any earnings you have on your contributions to the account.
Roth IRA Rules
Distributions from Roth IRA
You can start taking distribution from your Roth IRA account at the age of 59 1/2. Your account must be open and the first contribution must have been five years ago. There are also qualifying distribution that can be made before the age of 59 ½ as long as the plan has been open for at least five years.
- Distribution for qualified first time home purchase or to build a first home.
- Distributions if you become disabled (as per the IRS code).
- Distributions made to your beneficiary or to your estate, after you die.
Eligibility Criteria for contributing to Roth IRA
There are no age restrictions to invest in a Roth IRA account, however there income and contribution limits which apply.
Roth IRA contribution limits
Since Roth IRA offers you an opportunity to save for retirement and without paying taxes on your earnings, there is a limit to how much one can contribute to it. Also there is a maximum income limit for one to be eligible for Roth IRA. Each year Roth IRA contribution limits are reviewed for inflation
Roth IRA contribution limits 2013
For 2013, you can contribute a maximum of $5,500 (up to $6,500 if you are age 50 or older). The contribution limits have been raised by $500 from 2012. 2013 Roth IRA contribution limits also state that the contribution cannot be higher than your earned income in the year.
Roth IRA contribution limits 2012
The Roth IRA contribution limits were unchanged between 2008 and 2012. For 2012, you can contribute a maximum of $5,000 (up to $6,000 if you are age 50 or older). 2012 Roth IRA contribution limits also state that the contribution cannot be higher than your earned income in the year.
Roth IRA contribution limits 2011
The Roth IRA contribution limits were unchanged between 2008 and 2012. For 2011, you can contribute a maximum of $5,000 (up to $6,000 if you are age 50 or older). 2012 Roth IRA contribution limits also state that the contribution cannot be higher than your earned income in the year. Income limit for Roth IRA
In order to contribute to a Roth IRA account, your modified adjusted gross income (MAGI) must be below a certain level. The income limits and the contribution limits are reviewed every year for inflation.
For more details see our article on Roth IRA Income and contribution limits.
Opening a Roth IRA
Opening your Roth IRA account is easy. Nearly all traditional brokers and online discount brokers offer a Roth IRA account. But not all accounts are made equal, some have minimum balance requirements and some charge a fee to maintain your account.
Vanguard, Fidelity and T.Rowe Price are good place to start looking for a no fee or a low fee account to get started.
Roth IRA Contribution deadline
The contribution deadline for Roth IRA coincides with the tax filing deadline. That is great because you can make contribution for the previous year in the current year. 2012 Roth IRA contribution deadline is April 15, 2013. The 2013 Roth IRA contribution deadline will be April 15, 2014.
You can contribute to both a Traditional and a Roth IRS in any given year, but the contributions limits apply to both as an aggregate. This is also true if you have multiple Roth IRA accounts.
Please refer to the Wikipedia entry to learn more about the history of Roth IRA.
Additional Articles on Roth IRA
Roth IRA Income Limits and Contribution Limits
Roth IRA Conversion
Frequently Asked Questions about Roth IRA
Where to open no-fees Roth IRA accounts?