Definition: A personal retirement savings vehicle created by the Tax Payer
Relief Act of 1997. A Roth IRA allows certain investors to make
non-deductible contributions of up to $4,000 annually and, provided
certain requirements are met, offers tax-free and penalty-free
withdrawals for important financial needs in addition to
retirement.
Both traditional IRAs and Roth IRAs have the same annual
contribution limit: a maximum of $4,000 for the years 2005 through
2007. The amount will increase to $5,000 per person in 2008. But
that's where the similarities end. Unlike traditional IRAs,
contributions to a Roth aren't tax deductible. Money invested grows
tax-deferred, but, unlike traditional IRAs, all withdrawals after
age 59 1/2 are tax free, provided the Roth has been open for at
least five years. If you're choosing between saving for retirement
or for the down payment on your first house, all earnings and
interest up to $10,000 on your Roth can be distributed tax free to
purchase that home if withdrawals occur after five years,
regardless of your age.
If you have a traditional IRA, someday, you'll be faced with
mandatory distributions. The Roth IRA does away with that
eventuality. Your money can grow tax free forever--possibly
providing a lovely nest egg for you to pass on to your
offspring.
Before you decide to rush out and open a Roth, there's more to
the story. If you're hoping to roll money directly from a 401(k)
plan to a Roth, you can't--without a penalty. What you can do is
roll it over to a regular IRA and then convert that account to a
Roth. To qualify for the conversion, your adjusted gross income
must be less than $100,000. Since money that goes into a Roth
account must be after-tax money, you must pay tax on the money that
will be converted.
To qualify for Roth IRA contributions, a single person's
adjusted gross income (AGI) must be less than $95,000, with
benefits phasing out completely at $110,000. For married couples
filing jointly, the AGI must be less than $150,000. The
contribution amount is decreased by 30 percent (35 percent if 50 or
older) until it is eliminated completely at $160,000 for joint
filers.