Roth IRA Basics

I've talked about Roth IRA's in lots of posts. In doing so, I've made some assumptions that everyone knows what a Roth IRA is. We'll, we all know what happens when we assume.

So, here's the 411 on a Roth.

1. Where did the name "ROTH" come from? The Roth IRA was born on January 1, 1998 as a result of the Taxpayer Relief Act of 1997. It's named after the late Senator William V. Roth, Jr.
   
   
2. What's the big deal with a "ROTH" vrs a regular IRA? The chief advantage of the Roth IRA is the ability to have investment earnings completely escape taxation. This is a really big deal.
   
   
3. When can I contribute to my Roth? Annual IRA contributions can be made between January 1 of that year and April 15 of the following year. Because of the extra three and a half months, if you send in a contribution to your IRA custodian between January and April, be sure to indicate the year of the contribution so the appropriate information gets sent to the IRS. Remember, contributions to a Roth IRA are never deductible from a taxpayer's income (unlike a traditional IRA).
   
   
4. How much can I contribute in 2008? $5,000 if under age 50. $6,000 if 50 and older.
   
   
5. Can I take money out of my Roth without penalty? *Contributions can be withdrawn tax-free and penalty-free at any time. *There is 5-year clock 'A'. Clock 'A' starts on the first day of the first tax year in which any Roth IRA is opened and funded. *Earnings can be withdrawn tax-free and penalty-free after Clock 'A' hits 5 years and a qualifying event (such as turning 59.5, disability, etc.) occurs.
   
   
6. Are there income limits for eligibility? (Can I make too much money to contribute?) Yes. You need to look at your Modified Adjusted Gross Income. This is the last amount on the first page of your tax return. If this amount is greater than:
   
   *Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution)
   *Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution)

I'm a firm believer that no matter what type of retirement plan your employer offers, you will greatly benefit from having a ROTH IRA.