Roth IRAs

Reviewed: November 14, 2014
By FinanceWeb

The Basics

A Roth IRA is an individual retirement program that provides tax-free income after retirement. Roth IRA’s are liquid; one can withdraw the principal funds at any time without penalty. There are rules for eligibility, and limits on the amounts one can add each year. The basic operation of a Roth IRA is that an individual can deposit after-tax income into an account and allow it to grow by further deposits and compounding. After retirement, all of the funds in a Roth IRA can be used without further taxes.

Eligibility and Annual Limits

One must have a qualifying income level to contribute to a Roth IRA. Set by income and federal tax filing status, the 2015 limit for married joint filers is $167,000. The upper limit is $105,000 for single or separate filers and $10,000 for married separate filers. The law sets a limit for Roth IRA contributions by calendar year. The maximum contribution for 2015 is $6,500 for account holders over 50 and $5,500 for those 49 or younger. One can make the annual deposits at any time before April 15 of the following calendar year.

Roth IRA Differs from an IRA

Roth IRA’s differ from regular IRA’s in some important ways. One funds a Roth IRA’s with after-tax income. The taxes, therefore, are paid before contribution. As a result, there is no taxation of this amount when withdrawn at any time. The benefit of the Roth structure is that the interest and compounded interest earned by the account holder’s deposits will also not be taxed. The Roth theory is that one pays taxes in the beginning and none later. The IRA defers taxes in the beginning and charges them later on withdrawal of principal. In practical operation, the Roth IRA is more flexible than standard IRA’s. The Roth plan can begin any time after retirement age; the standard must begin at the required minimum date. Contributions under Roth can continue past age 70 for as long as one wishes to add funds.

Roth IRA Penalties

Withdrawal of principal from a Roth IRA is free of penalty or taxes because the government has already taxed these funds. However, early withdrawal of the earned interest will cause a penalty if younger than 60. One can convert finds from a standard IRA and deposit them in a Roth account. One can convert funds from a regular IRA to a Roth account. One cannot withdraw funds converted from a standard IRA for five years from the date of conversion. Early withdrawal of converted funds causes a penalty. A Roth IRA is an excellent opportunity to add funds for retirement and improve economic security. The primary benefit is that one can distribute the earnings and compounded earnings in retirement tax-free. Despite its technical nature and many rules, there are advantages for working people in using Roth IRA for retirement security.

Advantages of A Roth IRA

It is an extra set of savings, compounded assets, and tax-free income for retirement. The plan is flexible as to use of assets. The Roth plan permits one to use assets other than cash. In a Roth IRA, one can use an annuity contract, stocks and bonds, CD’s, and real estate as assets. It has greater flexibility than standard IRA’s. One does not have to start at a certain time or age. One can continue to make contributions and build savings as long as one wishes. An estate can distribute Roth IRA funds without further taxation. A Roth IRA is a workable solution for any working person and at any age.