What is a Roth IRA?

Published by Thomas Herold in Investments, Retirement

'Roth IRA' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Roth IRA is a particular type of Individual Retirement Account. These Roth IRA’s prove to be special retirement plans that are given favorable tax treatment. The tax laws of the United States permit tax reductions on restricted amount savings for retirement accounts.

Roth IRA’s are different from other IRA’s in several ways. Among the chief of these is that tax breaks are not given on monies that are put into the plan and account with a Roth IRA. Instead, these tax breaks are given out on the money and its investment gains when they are taken out of the account at retirement. This chief appeal of Roth IRA’s is that they provide completely tax free income at retirement.

Other Roth IRA benefits over traditional forms of IRA’s exist as well. The restrictions placed on the kinds of investments that they are allowed to contain are fewer. You can turn them into gold IRA’s and annuity account IRA’s. Roth IRA’s can also contain all of the usual forms of investments that IRA’s contain, such as mutual funds, stocks, bonds, and certificates of deposit. More unusual investments such as real estate, mortgage notes, derivatives, and even franchises are allowed to be purchased with Roth IRA’s. These investment choices do depend on the capability and allowance of the Roth IRA trustee, or firm with which the plan is set up. Roth IRA’s also permit you to make un-penalized withdrawals of all direct contributions that you make, after the first five years of the account have and plan have passed, which is certainly not the case with traditional IRA’s.

These distributions, or withdrawals, are not taxed because they are taxed before the contributions are made. The penalties are waived for principal, as well as interest and earnings in the account, if the distributions are for purchasing a house or for disability or retirement withdrawal uses. If there is not a justified reason for the distribution, then the account earnings and income made above contributions will be taxed.

All IRA’s contain specific limits on the dollar amount of contributions that the government permits. This amount changes per year, and is set through the year 2011 now. Presently, you can put $5,000 per year into Roth IRA’s. There are income restrictions that govern whether you are allowed to make this full contribution as well. Individuals who make less than $106,000 are permitted to make full Roth IRA contributions, and those who make under $121,000 may make a partial contribution. Married couples who file together are allowed to earn less than $167,000 to make their full contribution to the Roth IRA, while those who make under $177,000 can do a partial contribution.

Roth IRA conversions from traditional IRA’s have been allowed by the IRA in the past, although with certain income restrictions. Beginning in 2010, this policy changed. Now the IRS permits any persons, regardless of how much money that they make, to convert their traditional IRA’s into Roth IRA’s.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Roth IRA' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.