What is a Roth IRA Anyways?
March 27, 2012
By Katie Bryan, America Saves communications manager
Today America Saves joins over 130 bloggers in the #RothIRAMovement. Our friend Jeff Ross at Good Financial Cents organized this little event after he gave some tips on saving at his alma mater and found that not one person had heard of the Roth IRA.
Saving for retirement was #4 on the 2011 list of Top America Saves Saver Goals. Many Americans can save for retirement through an employer-sponsored retirement plan, such as a 401(k) plan. Unfortunately, many do not have access to these types of accounts.
The good news is even if your employer doesn’t offer a retirement plan, you can still save for retirement, and get some tax benefits in the process, by putting money in an Individual Retirement Account (IRA).
Who qualifies to make IRA contributions?
Anyone who earns income (or receives alimony) can put money in an IRA. Couples can also put money in an IRA for a non-working spouse.
Each person can put up to $5,000 in an IRA if you are age 49 or below and up to $6,000 if you are age 50 or above for the 2011 tax year, so long as your contributions do not exceed your earned income. Each year, you have until the April 15 tax filing deadline to make your IRA payment for the previous tax year. (This means you still have time to contribute!)
There are two main types of IRA – traditional IRAs and Roth IRAs. In addition, those who are self-employed can put money in a SEP-IRA. Each has its own set of rules and offers different tax benefits.
ROTH IRAs Offer Tax-Free Withdrawals
You can’t make tax-deductible contributions to a Roth IRA. On the other hand, the money you put in a Roth IRA grows not just tax-deferred, but tax-free. In other words, you won’t have to pay any federal taxes, or state taxes in most states, on your earnings when you take money out, provided you meet certain requirements. You are also less likely to have to pay a tax penalty if you withdraw money early from a Roth IRA.
There are no age limits for contributions to a Roth IRA, so long as you have earned income. On the other hand, there are income limits. However, those limits are quite high. Singles who report adjusted gross incomes of up to $107,000 in 2011 and couples with incomes up to $169,000 qualify for a full contribution. Taxpayers with slightly higher incomes – $107,000 - $122,000 for singles and $169,000 - $179,000 for couples filing jointly – can make partial contributions.
Where Can You Open an IRA?
Virtually all major financial services companies – such as banks, brokers, insurance, and mutual fund companies – offer IRAs and make it easy to open an account.
A reputable mutual fund company that offers a wide selection of funds, low costs, and reasonable minimum investment requirements, is a particularly good option for many. Many of the top companies also offer excellent educational materials to help you pick the best funds for you.
Regardless of where you decide to open an account, your retirement savings will get a real boost if you commit yourself to making annual contributions an IRA.
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