A Roth IRA is an Individual Retirement Account (IRA) allowed under tax law in the US. With a ROTH IRA you can withdraw earnings tax free any time after the age of 59 and a half (provided the account has been open at least five years). There are many benefits to a ROTH IRA over a traditional IRA, but the single largest DISincentive to the ROTH is the lack of current year tax deduction (which the traditional IRA contribution has).
Generally speaking younger, more aggressively invested individuals benefit from a ROTH contribution over those nearing retirement who are more moderate/conservative in investment profile. Also, as your tax rates rise the traditional IRA contributions (with their tax deductibility) become more advantageous over the ROTH contributions.
The rules for a Roth IRA are different from a regular IRA account. For example, with a Roth IRA:
- Contributions are not tax deductible
- There is no mandatory distribution age
- All earnings and principal are 100% tax free upon withdrawal if all rules and regulations are followed
The eligibility and income limits for a ROTH IRA are:
- Earned income (or alimony) as least as great as your contribution amount, but not greater than $116,000 (single filer) or $183,000 (married filing jointly) to get the maximum contribution
- No age limit – even a minor can set up a Roth IRA account and contribute to it (assuming they have earned income)
- No employer plan limit – even if you participate in an employer plan (such as a 401k), you can still contribute to your Roth IRA account
As of 2015 the limits for contributing to a Roth IRA depend upon age. For those age 49 and below, the limit for a regular contribution to a Roth IRA is $5,500 and for those age 50 and above, the contribution increases to $6,500.
Whether a ROTH or traditional IRA is right for you, the government gives us few opportunities to save for retirement with benefits like these. If you’re still in the accumulation phase of life and saving for retirement, consider the ROTH IRA a viable opportunity for a tax-free retirement.