The Internal Revenue Service allows eligible U.S. taxpayers to make annual contributions to Roth individual retirement accounts. Individuals fund Roth IRAs with earnings that have already been subject to income tax. Roth IRAs are designed to supplement the traditional IRA and 401k in a retirement portfolio.
In 1974, Congress passed the Employee Retirement Income Security Act, which sanctioned the creation of individual retirement accounts for people whose employers did not offer pensions. IRA accounts were restricted to those with lower incomes, and they held money that had not been subject to income tax. In 1998, Sen. William V. Roth of Delaware proposed a motion that Congress passed to create Roth IRAs funded with after-tax money. In 2001, and again in 2006, Congress adjusted the income requirements for Roth participants and made it easier for high earners to contribute.
Roth IRAs, unlike traditional IRAs, are not taxable when withdrawn, as long as they are held until the owner reaches age 59 1/2. As of 2010, people age 50 or younger can contribute up to $5,000 per year to Roth accounts, and those age 50 or older can contribute up to $6,000 a year. People withdrawing funds from a Roth IRA account prior to age 59 1/2 are subject to a 10 percent penalty and have to pay income taxes on any earnings. Roth IRAs have no minimum distribution requirements.
Many people think of Roth IRAs as account types, but a Roth IRA is just an IRS designation applied to a sum of money. Roth IRA money can be invested in the same kinds of accounts as non-IRA money. Many people choose to invest Roth IRA money in mutual funds or stocks because they hope to outpace inflation. Banks offer IRA certificates of deposit and IRA savings accounts for more conservative investing.
The Federal Deposit Insurance Corporation only covers money placed in conventional bank products. Checking accounts, savings accounts, bank money markets and certificate of deposit accounts are covered by the FDIC. Accounts at credit unions are not FDIC-insured, but most of them are covered by the National Credit Union Administration depository insurance fund. Many bank officers are licensed to sell mutual funds and annuities, but although customers can buy IRA mutual funds and IRA annuities at the bank, they are not covered by the FDIC.
As of 2010, the FDIC covers bank Roth IRA accounts up to $250,000 per financial institution. The FDIC covers IRA money separately from nonretirement accounts so it does not have any relation to coverage limits on nonqualified accounts. Balances over $250,000 are not covered, but consumers can open multiple Roth IRAs at different banks and have $250,000 of FDIC coverage at each one. Traditional IRAs and other retirement accounts are bracketed together with Roth IRAs under FDIC coverage limits, and adding a beneficiary will not increase the maximum coverage.