Roth IRA Basics in a Question and Answer Format
This post will cover Roth IRA basics and terminology in a question and answer format. If you have any unanswered questions on Roth’s, please feel free to add them through a comment. You may also want to check out the IRS Roth IRA page for more info.
What is a Roth IRA?
A Roth IRA is a retirement investment vehicle. Within a Roth IRA you can purchase any investment that you’d like – cash, bonds, options, CD’s, stocks, mutual funds, etc.
How can I Start a Roth IRA?
Any of the discount brokerages offer a Roth IRA option. I have personally moved both my Traditional IRA and Roth IRA to because their IRA’s have no fees and their trades are only $4.95 each. If you’re into trading stocks or ETF’s, Zecco is a good one because they have $0 trades if you have a high enough balance. You can open one just like you would any other investment account.
Are Roth IRA Contributions Tax Deductible?
No.
What are the Benefits to having a Roth IRA?
Contributions that you make to a Roth IRA are after tax, meaning that you’ve already paid taxes on them. As a result, you do not have to pay taxes on them ever again. This includes distributions when you withdraw the funds in retirement. This can be advantageous because many people predict that they will be taxed higher in retirement than they currently are. Also, some people want to lower their taxable income or pass off their IRA to their heirs, tax free.
How does a Roth IRA differ from a Traditional IRA?
Contributions to traditional IRA’s are tax deductible at the time of contribution, however you must pay tax on your distributions in retirement. Contributions to Roth IRA’s, on the other hand, are taxed now so that distributions in retirement are tax free. You basically decide whether or not you want to be taxed now or taxed later when choosing which to contribute to.
Was it Named After David Lee Roth?
Hah, I crack myself up! No. The name ‘Roth’, comes from the legislative sponsor who proposed the type of IRA, William Roth. The name does not have any investment meaning behind it.
When can I Withdraw Contributions, Tax and Penalty Free?
At any time. You already paid the taxes on them.
When can I Withdraw Earnings Tax and Penalty Free?
Earnings distributions can be made without tax and penalty at age 59 and 1/2 if they have been held in a Roth IRA for a minimum of 5 years.
Are there any other Times Earnings are Tax and Penalty Free?
Yes, in the event of death, disability, or first time home purchase.
What if Earnings are Taken out Before Retirement Age?
They are subject to income tax and may also be subject to a 10% penalty.
Can I have a Roth and Traditional IRA at the same Time?
Yes.
What is the 2009 Roth IRA Contribution Limit?
$5,000.
What is the 2010 Roth IRA Contribution Limit?
Also $5,000
What is a Roth IRA Catch-up Contribution? How much is it?
If you are age 50 or older, you can contribute an additional amount to a Roth IRA each year. This is commonly referred to as a catch-up contribution for investors nearing retirement. For 2009, the Roth IRA catch-up contribution is an additional $1,000. The 2010 catch up contribution is the same.
What is the Contribution Deadline for a Roth IRA?
You can contribute up until the tax filing deadline in the following year. In other words, for the 2008 tax year, you can contribute up until April 15, 2009. For the 2009 tax year, it is April 15, 2010.
Can I Contribute to a Roth and Traditional IRA in the Same Calendar Year?
Yes, you can contribute to both a traditional and Roth within the same calendar year, but the maximum IRA contribution limit allowed by the IRS is for the two combined. For 2009, this means that you could contribute $5,000 total between the two.
Are there any Income Limits for being able to Contribute to a Roth?
This is kind of a tricky one. What matters here is your modified adjusted gross income (MAGI), which is essentially your income after deductions (without getting too complicated). Once you hit a certain point, your eligibility starts to get phased out, as you can see below:
- Single filers: Up to $101,000 (to qualify for a full contribution); $101,000-$116,000 (to be eligible for a partial contribution); over $116,000 (you can’t contribute)
- Joint filers: Up to $159,000 (to qualify for a full contribution); $159,000-$169,000 (to be eligible for a partial contribution); over $169,000 (you can’t contribute)
- Married filing separately (if the couple lived together for any part of the year): $0 (to qualify for a full contribution); $0-$10,000 (to be eligible for a partial contribution); over $10,000 (you can’t contribute)
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You may also find the following articles of interest:
IRS 401K Maximum Contribution Limits
5 Benefits of Using a Traditional IRA
Review of Zecco’s Online Discount Brokerage
David Lee Roth, you sneaky guy. Good overview of just about anything you’d want to know about a Roth IRA. I maxed mine out last year, but it might be hard to duplicate this year.
Ah, nice intro. Bookmarked. I’ll “link out” to this article down the road when I go through different investment tools. Saves me time!
Excellent summary. I’ll probably link to this post soon!
I did find this very interesting and necessary for a beginner like me. I’m trying to start a new IRA account and hopefully budget the minimum per month to contribute just to get things started. Where can you begin to set up one of these accounts?
@Craig – any discount broker really. I have mine through Etrade b/c there are no maintenance fees (but I don’t know if that’s grandfathered in, or still true today).
@GE Thanks, I’m going to do more research, talk to my parents, and then decide on where to start
To the author G.E. Miller – my husband and I each have a Roth IRA which matures on 3/29/09. Can we only make a contribution on or around this maturity date, or can one contribute to a Roth IRA at any time?
How do I decide what types of investments should go into my Roth IRA. ING Direct offers a Roth IRA consisting of CDs, whereas Fidelity offers Roth IRAs consisting of one of their Freedom Fund mutual funds. Can a Single Roth IRA have both? What factors should go into deciding what types of investments should go into a Roth, especially given today’s economic climate?
@G.E. – You manage to provide a very concise and valuable overview of Roth IRA features in just one page ¦ Very well done!
@Kelly – You can contribute to your Roth IRA on any day of the year and up until April 15th of the following year. For instance, if you want to make a contribution for the 2009 tax year, you can do so anytime until April 15th, 2010. Contributions after that date count toward the 2010 tax year.
@Nicole – An individual person can only have one Roth IRA, although the account can be split between multiple institutions. For instance, you can have a Roth IRA with both Fidelity and Charles Schwab, but in the eyes of the IRS, its the same Roth IRA.
That said, you can hold multiple types of investments inside your account ¦ CDs, stocks, bonds, etc.
As for what you should invest in, it really depends on your age, your goals, and your time horizon. If you’re still twenty or so years from retirement, then a stock index fund is probably a better choice than a CD, because you’re more likely to beat inflation – even in a scary environment like this. Stocks are cheaper now than a year ago, so now is probably a great time to get in for the long-term.
Very nice Q&A! I will probably max out mine soon; trying to get in as much as I can before the market rebounds.
I have a Roth IRA.I have been declared Disabled. I am 46 yr old.
I understand that I must get rid of it. I do not want to lose it
It is about 5,300.oo Is it possible to have it put in a special
needs trust.
Great summary about Roth IRA. Thanks for that!
I am 24 and have been thinking for a while now to open a Roth IRA account but i simply cannot decide which would be a best investment (not knowing much about the options available and pros and cons of each) thats safest in terms of losing money if the prices of stocks go lower.
Under what is roth IRA you said
“you can purchase any investment that you’d like – cash, bonds, options, CD’s, stocks, mutual funds, etc.” can you explain this a bit more, maybe pros and cons of them and rate them from safest to riskiest?
A website where i can collectively read about them would be helpful as well.
Thanks
I’m retired, I get a small pension and social security benefits for income, total about 23,000 a year. Can I roll over my traditional IRA to a Roth IRA? Is it wise to do this?
New reader here! Just wanted to say great overview of the Roth! I think I’ll be linking back to it in an upcoming post on retirement account overviews.
New reader here!
Just wanted to say great overview on Roths! I think I’ll be linking back to it in an upcoming post on retirement account overviews.
I have a variable rate annunity which I first purchased in 1996 and have been making annual contributions. The VR annunity serves as my SEP. I have learned that I can now withdraw 15% of the annunity value each year without any surrender charges from the issuing company (Hartford). I’m wondering if I can take that 15% withdrawal each year from the VR Annunity and fund a Roth IRA? I presume I’ll have to pay takes on the 15% withdrawal, would it be worth it? Is it legal?
I’m a active duty soldier and have been trying to do my homework on the best retirement investment option for me. Quick rundown on my situation/dilemma, hah. I 26 years old, been married about a year, and me and my wife have a child due (first) on Feb, 12th 2010. That being said, I have been in the army for 3 1/2 years and just re-enlisted for 4 more. I plan on staying for at least 20. With me sharing all that, the part I get confused about dealing with retirement is that the army tries so hard to push the TSP on me. My wife, who works for the VA (a nurse) has the TSP since its a federal job. they actually match her up to 5%. The army’s TSP doesnt match at all. I decided to try to learn about other IRA options and discovered the ROTH IRA, which is interesting me very much, because of the “pay taxes now, withdraw tax-free later”. As I stated earlier, I’m active duty military so the benefits are wonderful ( from both me and my wife’s job ) but I dont have a whole lot of extra money to put up front every month for retirement. I’ll try to cut the rambeling, and get to the point, hah. Im just very confused as far as my situation as to what is best for me and my family. I certainly plan to retire from the army after 20, (I’ll only be 43) and start another job to retire at, but Im looking at either a IRA, TSP or ROTH IRA with limited funds on a military salary. Also, when it comes to the TSP , and the ROTH IRA, the different ways you can invest confuses me a lot. Sorry for typing so much and asking so much, this has been a major headache for me ever since I started researching and learning, but now I am addicted to ” retirement knowledge “. I guess someone previously stated that the is some form of a equation for what you should invest in, dealing with what your goals are, TIME ( I think is a big one) etc…. Once again, sorry for writing so much and ANY information would be more than helpful, thank you.
Josh
I have my Roth fully invested in closed end funds that pay
monthly dividends. Do you pay tax of any kind on those
dividends and what about a capital gains tax on any stocks
that may be in there ?
IRA is a good thing. But the government should regulate risks of the operating companies necessarily
Very easy to read and to understand. I like simple stuff and straight forward.
IRA is a good thing. This one is a really nice investment article. Would save my time, so i have bookmarked it.
I am new to this… very new and I have a question. It might be a dumb one, or one that doesn’t make any sense. Ok, let’s say I start a Roth IRA at age 24. As an individual it is ok for me at this time because I am not married. Now let’s say I get married within 5 years. Does this affect my individual Roth IRA?
What I mean is that by first doing this young like me then getting married is that still ok? I know you touched up on it in your seceond to last qusetion, but I was curious about this part.
Sorry if my question doesn’t make any sense, which it probably doesn’t but any information would be helpful thanks!
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Very informative post. Also worth noting that the contribution limits stay the same in 2010.
I’m active duty as well…just read Josh’s post (13 July) and have similar questions. I didn’t really see where anyone answered him (maybe I missed it), but here’s my situation – military, married, kids, can afford about $200 per month contribution, eligible to retire in 6 or up to 10 years (prior enlisted officer) at 40-45 years of age, plan to get another job afterward. I always hear/read about stock/cd/bond Roth IRAs. I’m not too savvy when it comes to all that. How do cash ROTH IRAs work? Which companies have the best interest rates? Is it like a savings account that you don’t touch until you’re at least 59.5 years? Thanks.
I have been unemployed the whole year with no earned income. Can I contribute some of my unemployment money to a Roth IRA?
When I start withdrawing my traditional IRA and Roth IRA money and pay the taxes, will I in anyway be double taxed on my Roth IRA since I already paid taxes on that money?
In 2008 I put 3000 in Roth took out 1500 for an emergency. AGI was 155K for 2008. Full contribution in 2009 dividends re-invested. Now come to find out that my AGI was about 185K. Already started contributing for 2010. What do I do? Should I pull it out and…???
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