Today I want to do a quick post on the basics of the Roth IRA. I've done several posts on them previously, but all on a specific point about Roth IRAs, including the 2010 Roth IRA Conversion. Today I'll bring it all together in one comprehensive Roth IRA post.
What Is A Roth IRA
The Roth IRA account was brought into existence in 1997 when the Taxpayer Relief Act of 1997 was passed. The chief sponsor of the bill was the late Senator William Roth of Delaware. (Does the name of the account make more sense now?). The Roth IRA (Individual Retirement Arrangement) is a retirement vehicle in which you can invest in securities, stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible).
The reason that Roth IRAs have become so popular since they passed is the fact that they are a tax free withdrawal retirement account – since you don't have to pay taxes when you take the money out at retirement.
Contribution Limits For 2010
The Roth IRA contribution limits have been the same since 2008 at $5,000. If you are age 50 and above you can make an extra contribution of $1,000, which means you can contribute a total of $6,000. It isn't anticipated as of yet that they will be rising next year. Time will tell for sure. Here's a quick chart showing where the contribution limits have been since 2002.
| Year | Age 49 and Below | Age 50 and Above |
|---|---|---|
| 2002-2004 | $3,000 | $3,500 |
| 2005 | $4,000 | $4,500 |
| 2006-2007 | $4,000 | $5,000 |
| 2008 | $5,000 | $6,000 |
| 2009 | $5,000 | $6,000 |
| 2010 | $5,000 | $6,000 |
Roth IRA Income Limits
The income phaseout limits for contributing to a Roth IRA start getting phased out at about $105,000 for single filers, and at $167,000 for married filing joint filers on a Roth IRA.
| IRA Type | Single | Married Filing Jointly |
|---|---|---|
| Roth IRA | $105,000 – $120,000 | $167,000 – $177,000 |
Once you reach the lower end of the phaseout limits, figuring out how much you can contribute to the Roth IRA becomes a bit of a complicated math problem. Basically you will subtract your modified adjusted gross income from the upper end of the phaseout range, divide by the amount of the spread in the range. You'll get a percentage after you divide. That percentage is the amount of the full $5,000 that you can contribute. So if you're resulting number is 66% – you can contribute 66% of $5000 – or $3300.
For a full explanation of figuring out how much you can contribute, check out this post on Roth IRA Eligibility.
At What Age Can You Contribute To A Roth IRA?
As long as you have an earned income along with a W-2 or 1099, there are no age restrictions on who can contribute to a Roth IRA. That babysitting job your kid had last year probably won't cut it, but if they pushed carts at the local grocery store – they're good to go.
Opening A Roth IRA
Opening a Roth IRA is a pretty simple process that shouldn't take you more than an hour or two from start to finish. Basically you just have to figure out where to open the account (bank, discount brokerage or full service mutual fund company), how you'll be funding your investments, and what types of things you'll invest in.
For a further more in-depth discussion of opening an account, check out this post: How To Open A Roth IRA And Where To Open An Account
Conclusion
Roth IRAs are one my favorite investment vehicles, and one that I invest in first. I love the idea of diversifying my tax situation at retirement by having a mix of taxed and non-taxed withdrawals to enjoy at retirement. That way I'll make sure that no matter if my taxes are higher or lower at retirement, it won't matter very much because I've got investments that were taxed previously, and ones that will be taxed now.
So what do you think of the Roth IRA? Do you have one, and would you suggest others get one too?
