IRA Roth Accounts

What is a Roth IRA?

Retirement Planning and retirement plans


The Roth IRA is a unique, tax-advantaged way for investors to save for retirement. Although contributions are not tax deductible, withdrawals are tax-free - as long as they are made after age 59 and the account has been in existence for at least five years. This allows your earnings to compound free of taxes with no future income tax consequences. Of course, Roth IRAs may not be suitable for all investors - you'll need to consider your own personal financial situation.

What the the advantages of a Roth IRA?

Roth IRAs can provide a tax-free source of retirement income. Contributions to a Roth IRA are not deductible, but withdrawals - including any earnings - are generally free from federal income taxes. Roth distributions are tax-free if you begin withdrawals at least five years after establishing the account, and you are at least age 59 at the time of the withdrawal; or you are using the funds for the purchase of a first home or you are disabled or deceased.

Unlike traditional IRAs, Roth IRAs allow you to make contributions after age 70.

While a Traditional IRA requires minimum distributions starting on April 1 of the year after you reach 70, there are no minimum required distributions with a Roth IRA.

Roth IRA Contribution Limits

The chart below shows your total annual contribution limits for all IRAs. Your total annual contribution to all IRAs (including Traditional IRAs) may not exceed the lesser of: your age-based limit or 100% of your earned income.

Year Below Age 50 Age Over 50
2005 $4,000 $4,500
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 $5,000 $6,000

Adjusted Gross Income (AGI) Limits

For single filers, the AGI limit is up to $95,000 for 2006 and $99,000 for 2007 ($95,000-$110,000 in 2006 and $99,000-$114,000 in 2007 for a partial contribution)

For joint filers, the AGI limit is up to $150,000 for 2006 and $156,000 for 2007 ($150,000-$160,000 in 2006 and $156,000-$166,000 in 2007 for a partial contribution).

Roth IRA Conversions

You may convert a traditional IRA to a Roth IRA in any year your AGI doesn't exceed $100,000, provided your tax status is not "married filing separately." However, the amount you convert from a traditional IRA to a Roth IRA is generally considered part of your taxable income for the year of conversion. However, you may incur this penalty if you subsequently withdraw converted funds from the Roth IRA before age 59 and sooner than five years after establishing your Roth IRA. Contact a financial professional or tax adviser for more detailed information on conversion-related issues.

You don't have to choose one type of IRA over the other. You may have both a traditional IRA and a Roth IRA, contributing to either or both whenever you wish.