Roth IRA

The tax-free distribution feature is one of the main differences between a Roth IRA and a traditional IRA.

Roth IRAs allow your contributions and earnings to grow in a tax-free shelter. When you are ready to take distributions from the plan, the money comes free of income taxes as long as you follow the rules.

Of course, the whole transaction doesn't escape taxes. Unlike traditional IRAs, contributions to Roth IRAs are not deductible from current income tax, which is another major difference between the two plans.

Roth IRAs have the same contribution limits as traditional IRAs – up to $5,000.

Taxpayers age 50 and over have a special catch-up period that allows them to add another $1,000 per year.

Your contributions and earnings grow in a tax-free account until you begin withdrawals – usually not before age 59½. You can withdraw your contributions at any time without tax or penalty. However, in most cases, the IRS imposes a 10 percent penalty on withdrawal of earnings before the age of 59½ if the account has been opened fewer than five years.

• You can make an early withdrawal (before age 59½) if you use the money for the purchase of a first home or to cover college costs and the account has been in existence for five years.
• You can contribute to an IRA up until the date your income taxes are due for that year. For example, you could fund an IRA by April 15, 2010. However, the sooner you fund an IRA, the sooner it can start working for you.
• You never have to take distributions.
• You can contribute to a Roth IRA if your modified adjusted gross income is below $120,000 (single) or $177,000 (joint). Allowed contributions begin to phase out at $105,000 (single) and $167,000 (joint).
• You can, under certain circumstances, convert a traditional IRA to a Roth IRA.

Roth IRAs may appeal to investors who believe they will be in a high tax bracket when they retire. Although somewhat more complicated than traditional IRAs, Roth IRAs have unique features that make them very attractive to some investors.

Any tax or legal information provided is a summary of our current understanding and interpretation of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their specific situation.

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