A Roth IRA (Individual Retirement Account) is retirement plan when withdraw is not taxed, provided certain conditions are met.

 

A Roth IRA can invest money in securities, usually common stocks and bonds, often through mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible).

 

A Roth IRA can also be an annuity, which is an annuity contract or an endowment contract purchased from a life insurance company. As with all IRAs, specific eligibility and filing status requirements are mandated by IRS.

 

The total contributions allowed per year to all IRAs is the lesser of one's taxable compensation (which is not the same as adjusted gross income) and the limit amounts as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed)

Year	Under age 50	50+ Catch-up Contribution
2019	$6,000	$1,000

 

Advantages

Withdrawn from Roth IRA is tax free at any time. Rollover, converted (before age 59½) contributions held in a Roth IRA may be withdrawn tax and penalty free after the "seasoning" period (currently 5 years). Earnings may be withdrawn tax and penalty free after the seasoning period if the condition of age 59½ (or other qualifying condition) is also met.

 

If there is money in the Roth IRA due to conversion from a traditional IRA, the Roth IRA owner may withdraw up to the total of the converted amount without penalty, as long as the "seasoning" period (currently five years) has passed on the converted funds.      

 

Disadvantages

Contributions to a Roth IRA are not tax deductible

Eligibility to contribute to a Roth IRA phases out at certain income limits.

Contributions to a Roth IRA do not reduce a taxpayer's adjusted gross income (AGI).

 

A taxpayer who pays state income taxes and who contributes to a Roth IRA (instead of a traditional IRA or a tax deductible employer sponsored retirement plan) will have to pay state income taxes on the amount contributed to the Roth IRA in the year the money is earned.

 

The perceived tax benefit may never be realized.

 

Income limits

A taxpayer can contribute the maximum amount listed at the top of the page only if their Modified Adjusted Gross Income (MAGI) is below a certain level (see below).

 

The lower number represents the point at which the taxpayer is no longer allowed to contribute the maximum yearly contribution. The upper number is the point as of which the taxpayer is no longer allowed to contribute at all. Note that people who are married and living together, but who file separately, are only allowed to contribute a relatively small amount.

 

However, once a Roth IRA is established, the balance in the plan remains tax-sheltered, even if the taxpayer's income rises above the threshold. (The thresholds are just for annual eligibility to contribute, not for eligibility to maintain a Roth IRA.) This would be a wise move for retired people who have a comfortable asset base to pay the taxes.

 

To be eligible, one must meet the earned income minimum requirement. In order to make a contribution, one must have taxable compensation (not taxable income from investments). If one makes only $2,000 in taxable compensation, one's maximum IRA contribution is $2,000.