The ROTH IRA
Named after Senator William Roth of Delaware, the Roth IRA has the benefit of tax-free distributions.
There are several other benefits, as well.
Contributions to a Roth IRA can continue after the investor reaches age 70 1/2.
In addition, new tax laws effective January 1, 2002, have increased contribution limits for the Roth IRA, as follows:
- Tax Years 2002-2004: $3,000 single and $6,000 married filing jointly
- Tax Years 2005-2007: $4,000 single and $8,000 married filing jointly
- Tax Year 2008: $5,000 single and $10,000 married filing jointly
- Tax Years 2009 & after : Cost-of-Living Indexing
Workers age 50 and older before the end of the tax year can make additional "catch up" contributions over the maximum limits above, as follows:
- Tax Years 2002-2005 : $500
- Tax Years 2006 & after : $1,000
However, Roth IRA contributions are not tax-deductible.
(Individuals in the highest income brackets may be subject to contribution limits of less than the amounts given above. Consult your tax advisor for details.)
The advantage of a Roth IRA is that distributions are made tax-free!
The principal balance in the IRA may be withdrawn tax-free anytime. (Earnings, however, are subject to a 10% tax penalty for early withdrawal.)
Early withdrawal of earnings is permitted without penalty if:
- The investor is age 59 1/2 or older.
- The investor dies, resulting in a payout to a beneficiary.
- The funds are used for a first-time home purchase.
- The funds are used for qualifying higher-education expenses.