Business Finance

Understanding IRAs - The Roth Individual Retirement Account

Written by Bennet Grill for Gaebler Ventures

An Individual Retirement Account, or IRA, is a type of account which allows investors to contribute to their retirement through a beneficial tax structure. IRAs may be started by employees or employers and have a variety of different structures and applications. This article reviews the Roth Individual Retirement Account.

The Roth Individual Retirement Account came into being as a result of the Taxpayer Relief Act of 1997.

Understanding IRAs The Roth Individual Retirement Account

Sponsored by Senator William V Roth, Jr. of Delaware, the Roth IRA uses post-tax contributions to fund an account which, upon retirement distribution, does not pay any additional taxes. This structure is contrasted by the Traditional IRA, which uses pretax contributions to fund an account whose distributions will pay ordinary income tax.

Unlike Traditional IRAs, Roth IRAs do not restrict participation based on an individual's coverage under employer provided retirement plans. This is largely due to the contributions to a Roth IRA being non-deductible. Originally, Individual Retirement Accounts were only allowed for workers who were not covered by a qualified pension plan under their employer. Roth IRA accounts are open to any individual who falls within the correct modified adjusted gross income (AGI) range.

In 2008, if you were married and filing jointly you were able to contribute to a Roth IRA if your modified AGI was below $169,000. At $159,000, the allowed contribution amounts begin to be phased out. If you were filing as single and had a modified AGI of less than $116,000 then you were able to contribute to a Roth IRA, with the maximum contribution level being phased out at $101,000.

Unlike a Traditional IRA, the Roth IRA does not require that you begin withdrawing funds from your account at the age of 70 ½; in fact, you can continue too contribute funds to your Roth IRA as long as you are alive. Like the Traditional IRA, in 2008, the upper cap for contributions was $5,000 a year. If you are over the age of 50, you are allowed to contribute a "catch-up" amount of $6,000 per year.

Also like a Traditional IRA, the Roth IRA allows withdrawals for certain qualified expenses before the age of 59 ½ that are not subject to the 10% early withdrawal fee, including up to $10,000 for the purchase of a new home or money used to pay for higher education expenses for an individual or his spouse, or any subsequent children or grandchildren.

Roth IRAs are a great way to save for retirement with money that grows tax free. To learn more about other IRA solutions, read about Traditional IRAs, SEP and Simple IRA plans, and Education IRAs.

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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