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What is a Roth IRA Account

Roth IRA accounts are a type of savings plan that allows for the allocation of money up to particular limits that are established by the IRS. These contributions are presented as non-deductibles on your tax form. One of the positive aspects of Roth IRAs is that they allow for withdrawals to be made that are exempt form taxes, but only up to pre-determined limits. If you have hold your account for at least 5 years and you have reached the age of 59 ½ you will not be penalized for the withdrawal of money. Compared to the traditional IRA, Roth IRAs allow their investors to further contribute to their accounts even after reaching the age of 70 ½.

As with traditional IRAs, Roth IRA accounts are allowed to be open in IRS authorized institutions such as credit unions, brokerages, banks and etc. After establishing your Roth IRA account with the chosen financial institution, the latter will send you the IRA adoption agreement and plan document as well as the IRA disclosure statement. As with traditional IRAs you don't have to wait till a particular time of the year to open an account, but you should start contributing to it before the tax filing deadline. 

Benefits of Roth IRA Accounts

One of the advantages of Roth IRAs is that you don't have to actively participate in your employer's retirement plan in order to make contributions. Roth IRAs overcome some of the limitations of traditional IRAs by allowing their investors to further contribute to their accounts even after they reach the age of 70 ½. Additionally, you will not be subject to any minimum withdrawal requirements. What is more, investors will benefit from Roth IRAs if they hold their accounts for at least 5 years in terms of exempting their money from taxes after the age of 59 ½. In contrast to traditional IRAs, the heirs of a Roth IRA account will not have to pay taxes on the acquired earnings.

Drawbacks of Roth IRA Accounts

Unfortunately, you face limitations regarding the amount you can annually contribute. Another limitation is the requirement of keeping your money in the Roth account for at least 5 years. If you withdraw them earlier and the amount is in excess of the contributions made, you will be subject to taxation and a penalty of 10%. The Roth IRA legislation is characterized by its volatility. Unfortunately, the Roth IRA has not succeeded in overcoming the requirement of minimum withdrawal limits that your heirs will be subject to.

Distribution Requirements

As with traditional IRAs, several Roth IRAs that are held by one investor are treated as one in executing the necessary tax consequences of distributions that have been made by any of them. In order to benefit from tax exemption of your Roth account, you should:

  1. Wait until the end of the required five-year period to take distributions.
  2. You should wait to reach the age of 59 ½ to make distributions to your beneficiaries, estate, the individual who has become disabled or applied to the purchase of your first home.

Contribution Limits

Year Under the Age of 50 Over the Age of 50
2006 $4,000 $5,000
2007 $4,000 $5,000
2008 $5,000 $6,000

We haven't provided contribution limits for later years, since they require cost-of-living adjustments.

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