ROTH IRA

A Roth IRA offers the potential for tax-free distributions upon retirement. A Roth IRA allows you to save taxes on your investments over the years by sheltering any annual growth or investment income in the Roth IRA. Unlike the traditional IRA or an employer-sponsored retirement plan, when it's time to take distributions from your Roth IRA, there are no federal taxes to pay on any dividends or capital gains earned.

Who Can Contribute

Eligibility is determined by individual modified adjusted gross income (MAGI), or combined income if filing jointly. Here are the contribution guidelines:

  • Single filers: Up to $105,000 (to qualify for a full contribution); $105,000-$120,000 (to be eligible for a partial contribution)
  • Joint filers: Up to $167,000 (to qualify for a full contribution); $167,000-$177,000 (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).

Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. (Contributions to a Roth IRA are nondeductible. Earned income must equal or exceed amount of contribution. Tax-free status is achieved when distributions are taken from the Roth IRA if it is held at least five years and the distribution is made for one of the following reasons: after age 59½, on account of disability or death, or for a qualified first-home purchase.)

Contribution Limits

For 2009 and 2010, the Roth IRA annual contribution limit is $5,000, or 100% of earned income, whichever is less.

Catch Up Contributions

For 2009 and 2010, individuals age 50 and older may contribute up to an additional $1,000 to their IRA for a total contribution limit of $6,000 or 100% of your taxable compensation for the year, whichever is smaller.

What are the benefits of a Roth IRA?

The major difference between a Roth and the other retirement accounts is when you get the tax break. Contributions to a deductible traditional IRA and to a 401(k) reduce your taxable income in the year the contribution is made, which cuts your income tax bill. These accounts are considered "tax-deferred" because you won't pay taxes on interest, dividends, or capital gains in the account during your working career. But when the money is withdrawn in retirement, it counts as ordinary income and will be taxed at the same rate as income earned from a job (i.e., not at the lower long-term capital gains rate).

With a Roth, contributions do not reduce taxable income, so there's no deduction. However, the Roth is a tax-,free account; no taxes are paid on the interest, dividends, or gains -- ever.

  • Tax-free Earnings

    Distributions from your Roth IRA after age 59 ½ and if the Roth IRA is held more than five years, are income tax free.

  • Save Taxes On Investment Income

    The Roth IRA allows you to save taxes on your investments over the years by sheltering any annual growth or investment income in the Roth IRA.

  • Make Non-working Spouse Contributions

    Depending on your modified adjusted gross income (MAGI), you may invest a nondeductible contribution of up to $5,000 to a Roth IRA for a non-working spouse, subject to joint-filer tax and earned income limits.

  • Early Withdrawal Option

    Nontaxable distributions may be available before age 59½ if the Roth IRA is held for at least five years and you meet certain distribution guidelines. (If the above criteria are not met, an early withdrawal of earnings before age 59 ½ may be subject to taxes and a 10% penalty as set by federal law.)

For more information about a ROTH IRA, contact your financial advisor or consult the Internal Revenue Service website at www.irs.gov.