Roth IRAs are one of the greatest wealth vehicles that has been made available to the average person in decades. By using after tax dollars to make your contributions, your growth and earnings are not taxed when you withdraw them after age 59 1/2!
Roth IRAs are similar to traditional IRAs, but with three major differences:
- All Roth IRA contributions are made with after-tax dollars.
- Investments in Roth IRAs grow tax-free and are not subject to tax upon withdrawal.
- Since Roth IRA contributions are made with after-tax dollars, they don’t qualify for tax deductions.
Roth and Traditional IRAs differ in a few other significant, but more complex, ways. The following table breaks down all the important traits of Roth IRAs, including all the specific features that distinguish Roths from Traditional IRAs.
Key Traits of Roth IRAs
Tax benefits
You never have to pay taxes on any investment gains or withdrawals if:
- Your account has been open for at least five years
- You withdraw at age 59 1/2 or later
- You use the money to purchase your first home
- You become disabled or die
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Eligibility
Plan participants can be any age. Singles with earned income below $110,000 ($173,000 for married joint filers) can make the full contribution plus the “catch-up” contribution, if applicable. Contribution limits decrease for singles with $110,000–125,000 of earned income ($173,000–$183,000 for married joint filers). Singles or couples with income above these ranges can’t contribute to a Roth IRA.
Vesting
All contributions vest immediately.
Enrollment deadlines
A Roth IRA for a given year must be set up by April 15 of the next year.
Contribution deadlines
All contributions to an IRA for a given year must be made by April 15 of the next year.
Contribution limits
Up to $5,000 per year or, if you’re age 50 or older, up to $6,000.
Contribution sources
Earned income (salary, commissions, other work-related sources, alimony).
Withdrawal penalties
Since Roth contributions are made with after-tax dollars and don’t qualify for tax deductions, no penalty applies to early withdrawals equal to the amount of your original contributions. Any gains realized by early withdrawals are subject to income tax and a 10% penalty, however.
Transfers
Most plans can be transferred to other Roth (after-tax) retirement plans.
Borrowing
Loans from Roth IRA accounts are not permitted.
Beneficiaries
You can designate primary and contingent beneficiaries. Roth IRAs are the only IRAs that can be passed on income tax–free to beneficiaries.
Required minimum distributions
Roth IRAs have no required minimum distributions.
Fees and minimums
Annual fees range from $0–50. Minimums range from $0–25, depending on the plan provider. However, Scottrade has no fee IRAs and you can easily use them to purchase commission free exchange traded funds.
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Roth income limits for making contributions are now between $110,000 and $125,000 for singles and heads of households this year – that’s up $3,000 from 2011.