A Roth IRA is a great way to invest for retirement in addition to or instead of any employment retirement account that you may have to opportunity to invest in. This type of account has advantageous tax benefits as well as the flexibility to contribute when you want. This article will give an overview of what this type of account is, qualifications to participate as well as limitations on how and when holders are able to withdraw money from it.
A Roth IRA is a stock market based investment account. It is usually composed of mutual funds or a variety of stock holding chosen by the account holder or pre-packaged stock varieties sold by brokers. Users who meet Roth IRA qualifications can contribute to the account over the years in order to build wealth for retirement. These accounts have tax advantages that allow holders to withdraw the entire amount tax free once they reach a certain age, usually around 60 years old.
Qualifications for this account are applied to contributions and not to whether an individual can open an account or not. Anyone can open a Roth IRA however individuals earning over 105,000 dollars per year AGI (Adjusted Gross Income) begin to have their contribution amounts limited and individuals earning 120,000 dollars or more AGI per year cannot make contributions to an IRA account. This is to prevent abuse of the tax shelter properties of the account. These amounts are set at 166,000 and 176,000 for married couples filing jointly.
Another qualification is that holders that are eligible to contribute an amount equal to their income for the year. For example to contribute 4,000 dollars to your Roth IRA, you must have earned at least that amount and reported it on your federal income tax return. There are limits to the amount qualified individuals can contribute such as in 2009, persons under the age of 55 could contribute up to 5,000 dollars to their Roth IRA accounts in addition to a 1,000 dollar “catch up” amount.
There are also penalties for early withdrawal from your Roth IRA. The account is designed to be a retirement account and the tax advantages are no longer available for persons withdrawing early from the account. Many brokerages will charge a fee of 5 to 10% on early withdrawals and this is not including the amount the federal government will charge in taxes on the amount withdrawn. This is to preserve the tax shelter properties of the account and to prevent abuses.
As long as guidelines are followed, a Roth IRA is a very effective way to save for the future. Money can be withdrawn tax free after account holders have reached a particular age and yearly contributions to the account can be very generous. Penalties do exist for early Roth IRA Withdrawal and holders should make themselves well aware of how these penalties can impact them should they have to take money out early for emergencies.