The Roth IRA is a type of retirement account with which you can avoid paying taxes once you reach retirement. With a Roth IRA, there are annual contribution limits that you must adhere to in order to take advantage of the account. You also have to meet the income eligibility requirements to make contributions.
The purpose of the Roth IRA is to provide retirement investors with a tool that they can use to build a large amount of tax-free income during retirement. With a Roth IRA, you can contribute money on an after-tax basis and then you never have to pay taxes on the gains from your account. This allows you to take care of your taxes on the front end instead of worrying about what tax rates could be later.
The Roth IRA has an annual contribution maximum that you have to abide by. As of 2010, the maximum amount that you can contribute to a Roth IRA is $5,000 per year. If you are over the age of 50, the Internal Revenue Service allows you to make a catch-up contribution of $1,000. This would bring your grand total up to $6,000 per year. Since the limit is the same as the traditional IRA, the effective money that you are putting away is actually greater because you have already paid the taxes on it.
In order to make a full contribution to your Roth IRA, you have to fall within certain income limits. As of 2010, if you are single, you can make up to $105,000 and still make a contribution to your Roth IRA. If you are married and you file your taxes jointly, you have to make below $167,000 to make a full contribution. If your income goes above that amount, you can still have your account, but you cannot make a contribution for the year.
The Roth IRA has a phase-out range on the income that allows you to make partial contributions once you get above a certain amount of income. For example, as of 2010, if you are single and you make somewhere between $105,000 and $120,000, you can make a partial contribution. If you are married and you file your taxes jointly, you can make somewhere between $167,000 and $177,000 and make a partial contribution to your account. The partial contribution will be a percentage of how much you are over the lower income limit. For example, if you are halfway into the phase out range, you can make half of a full contribution.
With the Roth IRA, you can access your contributions at any time after five years of having the account without paying a penalty. This is different from the traditional IRA, where you cannot touch your contributions without paying a 10 percent early distribution penalty. With the Roth IRA, you cannot touch the earnings from your account without paying the early distribution penalty. Since you have already paid your taxes on the money, however, the government does not mind if you touch the principal.