A Roth individual retirement account (IRA) and a Roth contributory IRA serve the same purpose: providing people with income for retirement. The one difference between the two is how they are funded. A Roth IRA may be funded either by converting a traditional IRA into a Roth IRA or by the owner of the account making contributions into it. A Roth contributory IRA refers only to one where the owner makes contributions.
Basics of a Roth IRA
The Roth IRA came into existence in 1998 as a result of the Taxpayer Relief Act of 1997. Named after Senator William V. Roth, Jr., the Roth IRA does not allow the owner to deduct his contributions from his taxes, but the tradeoff is that taxes are not paid on the earnings, and most withdrawals of earnings are tax-free, provided you are at least 59.5 years old and have had your Roth IRA for a minimum of five years. Your annual Roth IRA contribution cannot exceed the amount of money you made for that particular year.
Read More: How Much Will a Roth IRA Lower my Taxes?
Differences Between Roth IRAs and Traditional IRAs
The Roth IRA is attractive over a traditional IRA for several reasons, including the fact that you can continue to make contributions at any age, provided you are earning income from working. Unlike a traditional IRA, you are not required to start making withdrawals when you reach 72 years of age. A Roth IRA also has special allowances for making early withdrawals to purchase a first home or to pay for your children's college.
A Roth IRA is built using post-tax contributions. Even in retirement, Roth IRA distributions can be tax-exempt. This makes Roth IRAs very attractive for those looking to keep their tax payments low in retirement. Traditional IRAs are built with pre-tax dollars and will be taxed upon withdrawal in retirement.
Converting to a Roth IRA
The Taxpayers Relief Act of 1997 gave holders of regular IRA accounts the option to convert them to Roth IRAs. You will be liable for the taxes due on the money withdrawn from the traditional IRA to fund the Roth IRA, but you will not be subject to the 10-percent federal tax for early withdrawal, provided you place the money into a Roth IRA within 60 days. Such a transfer of money from one retirement account to another is known as a rollover.
Roth Contributory IRA Limitations
A Roth contributory IRA is one that is not funded by a rollover, but is funded by contributions from the account holder. The maximum amount you can contribute to a Roth IRA in 2021 is $6,000 annually or $7,000 if you are 50 or older by the end of the year.
There are also income limits to make the maximum contribution. In 2021, single taxpayers cannot have an adjusted gross income of more than $125,000, while married couples filing jointly cannot have an adjusted gross income of more than $198,000. As your income exceeds these levels, the amount you can contribute is reduced to the point where you may not be eligible to contribute to a Roth IRA at all.
Read More: Roth vs. Traditional IRA for Young Investors
A.G. Moody is a multiple award-winning journalist who has been writing professionally since 2000. He has covered everything from business to health issues. His work has appeared in the "Milwaukee Journal Sentinel" and numerous other newspapers and magazines. Moody earned a Bachelor of Arts in journalism from Eastern Washington University.