Roth individual retirement accounts are designed to hold funds that grow tax-deferred until people reach retirement age. The Internal Revenue Service establishes contribution limits each year based on a cost of living index. Contribution limits are determined by an individual's age and income, and many people are ineligible to invest in Roth IRAs.
As of 2010, the IRS allows people with earned income under the age of 50 to invest the lesser of their annual income or $5,000 in a Roth IRA. People over 50 can invest the lesser of their earned income or $6,000. The IRS calls the additional contributions for people over 50 "catch-up contributions," as they are intended for people close to retirement age to boost their retirement savings.
The IRS imposes income restrictions on high earners. As of 2010, people who did not live with their spouse during 2010 and who file as married filing separately, as well as people who file individually, can make the maximum Roth contribution if their annual income does not exceed $105,000. People earning between $105,000 and $120,000 can make partial contributions, while people earning above $120,000 cannot contribute. People who are married filing jointly can make full contributions if their earnings are below $167,000, partial contributions up to $177,000 and no contributions if they earn more than that.
People who invest in Roth IRAs have to choose what kind of investment to use for their retirement account. Banks and financial institutions often have minimum contribution restrictions for Roth IRAs. Most insurance companies allow people to invest in variable annuity or fixed annuity Roth IRAs, but they require minimum investments of between $2,000 and $5,000. Most mutual fund companies require minimum investments of $1,000. Some banks require $500 for Roth IRA CD accounts and offer savings IRAs to people who cannot afford the CD minimum.
Many people invest Roth IRA money in conventional bank products such as certificates of deposits or IRA savings accounts because they want federal protection for their assets. The Federal Deposit Insurance Corp. covers retirement accounts separately from non-retirement accounts. The FDIC provides $250,000 of coverage per account owner, per bank. People can have retirement accounts at multiple banks and enjoy $250,000 of protection at each one. The National Credit Union Administration provides the same level of coverage for its member credit unions.
Most people believe there are no protections for Roth IRA money invested in mutual funds, stocks and bonds or other instruments held in brokerage accounts. The Securities Investor Protection Corp., an insurer that's not federally backed, provides up to $500,000 of coverage for investors. The coverage protects investors in the event that the brokerage firm holding their assets goes bankrupt. It does not protect investors from poorly performing assets. The SIPC limits cash claims to $100,000, but other types of investments enjoy the full coverage limit.