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Encyclopedia > Roth IRA

A Roth IRA is an Individual Retirement Account (IRA) allowed under the tax law of the United States. Named for its chief legislative sponsor, U.S. Senator William V. Roth Jr. of Delaware, a Roth IRA differs in several significant ways from other IRAs. Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. ... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... William Victor Roth, Jr. ...

Contents

Overview

Established in 1998 (Public Law 105-34), a Roth IRA can invest in securities, usually common stocks or mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). As with all IRAs, there are specific eligibility and filing status requirements mandated by the Internal Revenue Service. A Roth IRA's main advantage is its tax structure. Contributions are made only from earned income that has already been taxed (and is not tax deductible), but withdrawals up to the total of contributions are federal income tax free, and withdrawals of earnings (anything above the total of contributions) are often free of federal income tax. Depending on with whom a Roth IRA is set up, it can be managed in creative ways, including investments in non-typical assets (Self-Directed IRA). Securities are tradeable interests representing financial value. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ... This article deals with U.S. mutual funds. ... A certificate of deposit or CD is, in the United States, a time deposit, a familiar financial product, commonly offered to consumers by banks, thrift institutions, and credit unions. ... Seal of the Internal Revenue Service Tax rates around the world Tax revenue as % of GDP Part of the Taxation series        IRS redirects here. ... A wage is the amount of money paid for some specified quantity of labour. ... Taxation in the United States is a complex system which may involve payments to at least four different levels of government: Local government, possibly including one or more of municipal, township, district and county governments Regional entities such as school, utility, and transit districts State government Federal government // Federal taxation... A Self-Directed Individual Retirement Account is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. ...


The total contributions allowed per year to all IRAs are limited as seen below (this total may be split up between any number of Traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):

Age 49 and Below Age 50 and Above
19982001 $2,000 $2,000
20022004 $3,000 $3,500
2005 $4,000 $4,500
20062007 $4,000 $5,000
2008* $5,000 $6,000

*Starting in 2009, contribution limits will increase in $500 increments based on inflation. Year 1998 (MCMXCVIII) was a common year starting on Thursday (link will display full 1998 Gregorian calendar). ... Year 2001 (MMI) was a common year starting on Monday (link displays the 2001 Gregorian calendar). ... Also see: 2002 (number). ... Year 2004 (MMIV) was a leap year starting on Thursday of the Gregorian calendar. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era in the 21st century. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Anno Domini (or common era), in accordance to the Gregorian calendar. ...


Eligibility

Income limits

As with many tools that offer tax advantages, Congress has limited who can contribute to a Roth IRA, based upon income. A taxpayer can only contribute the maximum amount listed at the top of the page if their Modified Adjusted Gross Income (MAGI) is below a certain level (the bottom of the range shown below). Otherwise, a phase-out of allowed contributions runs throughout the MAGI ranges shown below. Once MAGI hits the top of the range, no contribution is allowed at all. The ranges, for 2007, are: In U.S. tax law, modified adjusted gross income is determined by taking income from all sources (total, or gross income) and then making adjustments downward to arrive at adjusted gross income (AGI). ...

  • Single filers: Up to $99,000 (to qualify for a full contribution); $99,000-$114,000 (to be eligible for a partial contribution)
  • Joint filers: Up to $156,000 (to qualify for a full contribution); $156,000-$166,000 (to be eligible for a partial contribution)
  • Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution).

The lower number represents the point at which the taxpayer is no longer allowed to contribute the maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to contribute at all. Note that people who are married and living together, but who file separately, are only allowed to contribute a relatively small amount.


However, once a Roth IRA is established, the balance in the account remains tax-sheltered, even if the taxpayer's income rises above the threshold. (The thresholds are just for annual eligibility to contribute, not for eligibility to maintain an account.)


The ranges, for 2008, are:

  • Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
  • Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)

Conversion limit

TIPRA 2005 eliminates the MAGI limit on rollovers from a traditional IRA to a Roth IRA. Thus regardless of income, contributions can be made to a traditional IRA in previous years, and then rolled over in 2010. The Tax Increase Prevention and Reconciliation Act of 2005 (Public Law 109-222) was enacted on May 17, 2006. ... In U.S. tax law, modified adjusted gross income is determined by taking income from all sources (total, or gross income) and then making adjustments downward to arrive at adjusted gross income (AGI). ...


See also

  • 401(k) IRA matrix - 401k & IRA comparisons (401k vs Roth 401k vs Traditional IRA vs Roth IRA)

This does not cite any references or sources. ...

References

External links


  Results from FactBites:
 
Roth IRA Advisor (958 words)
Roth IRAs and their new cousins, the Roth 401(k)s and Roth 403(b)s, offer outstanding retirement and estate planning opportunities to most readers that qualify.
According to Roth IRA rules, to qualify for the maximum contribution, married taxpayers filing a joint return must have a combined Adjusted Gross Income (AGI) of less than $150,000 and your earned income must be at least as much as the amount you want to contribute to the Roth IRA.
Roth IRAs, with a few exceptions, grow income-tax free and owners are not required to begin taking minimum distributions at age 70½.
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