ROTH IRA

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ROTH IRA

A ROTH IRA is in some respects the opposite of a traditional IRA: You pay taxes on the money that you put into the account up front, but once you reach age 59-1/2, (after having had the Roth IRA for five years), you can withdraw the money, including interest earned, tax free. For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA lets you shelter more money for retirement. The annual contribution limit is the same for both a traditional IRA and a Roth IRA, and any contribution to one reduces the allowable contribution to the other, but because your Roth contribution is made with after-tax income, your annual contributions can compound substantially over the years without incurring any future tax liability. Whether the Roth IRA is a better option really depends on what you think your future tax rate will be. If you plan to maintain a high levels of income even in retirement, it may make more sense to pay taxes on your contribution today, while you're still employed, so you can enjoy the tax-free withdrawals later.

To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). Your modified adjusted gross income must be less than:

There is a partial phase out for married filing jointly beginning at $156,000 and for others beginning at $99,000. These phaseout limits are for the year 2007 and are indexed for inflation in 2009. Beginning in 2010, anyone may contribute to a Roth IRA regardless of their income.

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