All About Roth IRAs

By Nora Sutton , last updated June 13, 2011

The Roth Individual Retirement Account, more commonly known as Roth IRA, is an increasingly popular investment tool, traditionally used as a retirement savings account.

There are two different ways to start a Roth IRA account; either you can begin by converting a traditional IRA to a Roth IRA or by making regular contributions to your new account. Due to recent changes in laws, all taxpayers are eligible to convert traditional retirement accounts to a Roth account. Maintaining a retirement plan with your employer does not disqualify you from opening a Roth IRA. To start your Roth account by making regular contributions, there are some eligibility restrictions. The first restriction is that your income, or if applicable you and your spouse’s income, must at least be equal to if not exceed your total contributions. Income levels also dictate contributions and eligibility. As your income increases the amount that can be contributed will be decreased and eventually eliminated. The maximum contribution amounts for 2011 are $5,000 if you’re under 50 and $6,000 if you’ll be 50 or older by the end of the year.

Unlike traditional retirement accounts, your earnings are not taxed when they are withdrawn from your Roth IRA account. This does come at a trade off, because there is no deduction offered when you contribute to your Roth account. An advantage to Roth IRAs is that it is easier to take funds out, because in many cases distributions can be taken out without paying any early disbursement penalties. As long as you’re 59 ½ or older and have had your Roth account for at least five years, tax-free earnings can be withdrawn. Also, there is no rule stating funds need to be drawn at age 70½, which allows earnings to continue growing tax-free.

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