The Roth Individual Retirement Arrangement (or account to some) is one of the most popular retirement savings plans in the United States. This article will cover some of the most important points about the Roth IRA and its history.

What is a Roth IRA?

IRAs were created in 1974, but it was not until 23 years later when the Taxpayer Relief Act of 1997 was passed that Roth IRAs came into existence. William Victor Roth Jr., a Delaware U.S. Senator and lawyer, was the lead sponsor for this act, and so the Roth IRA was fittingly named after him.

The Roth IRA was created in order to allow taxpaying citizens to have more flexibility with their retirement funds. This type of savings account allows several advantages that other IRAs do not that could have extremely positive expectations for your money.

A Roth IRA operates the way most retirement arrangements do, in that it is simply an account that consists of different types of investments. These investments can be in securities, stocks, or bonds; owners can use mutual funds if desired.

Differences between Other Retirement Accounts

Typically the comparisons are made between Roth IRAs and Traditional IRAs to answer the question what is a Roth IRA. While they share a lot of similarities, the differences make a significant impact to the effect each IRA can have for your savings.

Traditional IRAs are the ones that most people are at least a bit familiar with. You get your income and are able to contribute a part(based on your Roth IRA contribution limits) of that to your Traditional IRA, this amount grows over time and then when you reach certain conditions and start to withdraw money you pay tax on it.

A Roth IRA is almost the polar opposite of a Traditional IRA in that you pay almost all of your taxes up front. You pay income taxes on your gross income, and only then can you contribute to your investment account. However, when you withdraw this money there are only rare specific cases where you have to pay taxes or penalties, otherwise it will be tax-free, including the earnings that have accumulated.

Final Thoughts on What is a Roth IRA

There are some restrictions on the money in a Roth IRA, but compared to a Traditional IRA it is much more flexible in regards to withdrawals. You can take out any part of your original contributions whenever you want with no penalty or fee, and there are benefits to help you take out some earnings tax free as well like when you are buying a home. Please refer to our article on the ‘Benefits of Roth IRAs’ for detailed information on other benefits.  I hope this article has cleared up any issues you had on what is a Roth IRA, if not check out our other articles for more detailed analysis.

The standard IRA is considered to be the Traditional IRA, which was the first IRA ever established. Both of them have certain advantages and disadvantages, but Roth IRAs are typically preferred now. The main difference is seen in the tax structure. A Roth IRA requires you to pay tax up front, which seems bad, but then you don’t pay any taxes on earnings or withdrawals later on. On the other hand you can usually defer taxes with a Traditional IRA, but you have to pay income taxes later on when you withdraw the money.

What is the Difference Between A 401k and Roth IRA?

One of the most common issues is whether or not to contribute to a work sponsored 401k or to a personal Roth IRA. 401ks are an investment vehicle just like Roth IRAs but typically have larger limits so you can contribute more. Unfortunately they are usually stricter too and don’t offer the same benefits as Roth IRAs. The best plan for most people is to deposit whatever your employer will match into your 401k, then max out your Roth IRA, and if you still have something left you can put it in your 401k.

Can You Do A 401k conversion to Roth IRA?

Of course! And it’s a great idea too in many cases. Unfortunately you can’t just do a conversion whenever you want. If you leave a job for whatever reason, THEN you have the option to either roll it over to a new employer’s plan or to convert it to a Roth IRA or Traditional IRA.

How Many Roth IRAs can you Have?

There is no limit on how many Roth IRAs or IRAs in general that you can have. You could have one with every financial institution if you wanted to. However, what there is a limit on is how much you can contribute TOTAL every year to the IRAs; this includes all types of IRAs, Roth or Traditional.

How Much can you put in a Roth IRA?

To continue on from the last question, there is a total contribution that you are allowed to contribute to your IRAs every year. How much you are allowed to put in a Roth IRA will depend on the Roth IRA Contribution limits for the year.

Q: What is a Roth IRA?

A: A Roth IRA is a relatively new type of retirement account that is in essence a modified Traditional IRA.  It is a very popular type of investment vehicle and one of the best ways for people to be financially secure by retirement.  The Roth IRA was named after its’ creator, William Roth, a senator and lawyer who advocated for more flexibility in utilizing retirement funds for all citizens.

Q: How does a Roth IRA work?

A: The main premise that the Roth IRA is built on is tax-free withdrawals.  You do of course pay taxes on your entry, but in many cases this situation is more beneficial.  Once you have contributed, the account serves as an investment vehicle by allowing you to purchase stocks, bonds, etc.  You can either handle your account yourself or turn it over to a professional for a small fee.  There is a lot of flexibility with the Roth IRA, to learn more visit our article on Roth IRA Benefits.

Q: Can i roll my Traditional IRA to a Roth IRA?

A: In the past there were limitations on converting your account based on your income, but these have been eliminated since 2010.  The only requirement to having a Roth IRA now is to have an earned income for the year.  Learn more about IRA Conversion here.

Q: When can you cash out a Roth IRA?

A: There are a lot of special circumstances that allow you to pull out money penalty free, but in general there are two conditions you must fulfill.  The first is that you must be 59.5 years old and the second is that your IRA must be at least 5 years old.  If you meet these two conditions you are more or less free to withdraw as you wish.  For more information, read Withdrawal Rules.

 Q: Can i pull money out of a Roth IRA for medical bills?

A: Sometimes you are able to do this, depending on the size of the bills.  If the cost of the treatment/expenses is over 7.5% of your taxable income, you will not pay penalties on your withdrawals.  If they are less than that you may pay penalties but not always.  In most cases you can withdraw your contributions absolutely penalty free.

Q: Can i contribute to both a 401k a Roth IRA?

A: You can absolutely contribute to both, in fact if you can you should.  The more interesting question is can you contribute to different kinds of IRAs.  In this case you are allowed to, but the total contribution (adding both account contributions together) must not exceed your maximum contribution (usually $5-6,000).

Benefits of Roth IRA

• Tax Free Withdrawals – You are allowed to withdraw any contributions (money that you have put in) from your Roth IRA tax free whenever you’d like.  However any money earned in the account can only be withdrawn tax free if 5 years has passed or you are over the age of 59.5 years old.  Unlike normal IRAs which you will be taxed for withdrawals if you are under 59.5 years old, as long as the 5 years has passed you will not pay taxes.
• Conversion Rules – You are permitted to convert a traditional IRA to a Roth IRA in many circumstances, although there may be some fees, the withdrawals will be tax free after certain conditions are met.  After the standard 5 year period, you can withdraw the full amount of converted funds without any penalties.
• Flexibility – You can have both a traditional IRA and a Roth IRA and contribute to both at the same time.  You can also have a 401k as well if that makes sense for your situation.
• Family Safety – If each spouse owns a separate Roth IRA, and one of them dies, the surviving spouse can combine the accounts with no penalty.  Similarly, if a single parent dies, their Roth IRA can be passed on to one of their descendants.
• Certainty of Taxes – While it may seem like a negative sometimes that you must pay taxes on deposits, it protects you from any higher effective tax rates in the future when you wish to withdraw, so you can know with more certainty how much money you will have available to you when you are older.
• Passing on Wealth – Previously mentioned was that the Roth IRA’s assets could be inherited from the owner upon death, but to expand on that point, there is no mandatory age at which you must start withdrawing from your Roth IRA.  This means that you could simple allow your assets in the account to keep appreciating to pass onto your family if you do not need it.
• Principal Residence Benefits – $10,000 in earnings in the Roth IRA are completely tax free when the money is used to buy a house (first time buying a house).  This money can be used when the owner of the Roth IRA is purchasing the house, or can be used if a spouse or children are buying the residence as well.  There are some minor restrictions to this, but is something that should be looked into.
• Contribution Limits – Here’s a benefit that can be deceiving at first, while the total maximum contribution limit is the same for your traditional and Roth IRA, the maximum contribution for each individually is effectively different.  For example, if your maximum contribution is $5,000, and you want to put it all in a traditional IRA, you simply put in the $5,000.  However, if you want to put the same $5,000, that is in after tax dollars, which means you are really contributing $5,000/(1- Tax Rate), where your tax rate is between 0 and 1 converted from a percent.  In essence you can contribute more to your Roth IRA because you are paying the taxes on the deposit versus the withdrawal.

Roth IRA Benefits Summary

As you can see from above there are many benefits of a Roth IRA, see which ones affect you and if a Roth IRA is your best choice.

One very good option for kids to begin with as they enter their teens is a Roth IRA.  In this post I’m going to go over the different aspects of a Roth IRA for kids.

Why Open a Roth IRA as a Kid

For most young adults, let alone teenagers saving and investing money is a foreign concept.  Unfortunately this has significant long term consequences in many ways.  There are a few main reasons it’s a good idea to open a Roth IRA for kids:

• Saving for the future: Whether it’s college or an alternative path, saving money will allow anyone, including kids, to have more choices and opportunities in the future
• Financial Literacy: Starting to invest early gives a great chance to start learning about stocks, bonds, and investing methods.  Many kids will enjoy this, but are rarely given the chance to do so as the current school curriculum lacks courses about even basic financial topics.
• Developing Good Habits: One of the biggest things that a child will benefit from is learning saving habits early on.  This will teach them about financial responsibility and pay huge dividends in their future while their friends are spending every last dime of any pay check.

Can a Child Even Open an IRA?

First things first, your child needs to be qualified to open a Roth IRA.  In order to do this there are no age limitations, but they must have some sort of taxable income.  Part time jobs are the most common solution to this obstacle, which will allow them to have money to contribute at the same time.  If you as a parent are self-employed you may be able to hire your child, which would allow you to easily max out the Roth IRA contribution limit every year.  However, as I’ll touch on next, it’s not necessarily a good idea to just hand your child contribution funds.

Benefits of a Roth IRA for Kids

Finally I want to look at why a Roth IRA is a better alternative than say a Traditional IRA or other alternative.  Like all accounts your child will get the benefit of compound interest, but even more so since they are starting so early (see this article on a $220,000 Honda Civic).

Secondly, middle school or high school students don’t make that much, partly because of their wages, and partly because they can usually only handle a part-time job.  The benefit of this is that with a Roth IRA they pay all their taxes up front, which means they will most likely be in the lowest tax bracket.

Thirdly, if they do go to university or some emergency arises, Roth IRA Withdrawal rules state that any previous contributions can be withdrawn at any time penalty free.  Note that the earnings would be penalized, but if possible leave them in to let them grow further.

That about wraps up my thoughts on Roth IRAs for kids, I strongly recommend you consider trying to get your kids involved with financial planning for their futures as early as possible.

Why Roth IRA Contributions are important

Everyone worries about having enough money saved up for when they retire.  One of the best ways to ensure a healthy retirement fund is through Roth IRA contributions.  A Roth IRA is arguably the best type of retirement account in the United States due to the advantages that comes with it.  Of those advantages, the most relevant is the compound interest that all accounts will have.

Compound interest takes place because you are leaving money in your account and accumulating more through low-risk investments, acting as a pseudo-interest on your account.  This means that all the ‘interest’ that you gain over time, will also gain interest, leading to exponential capital gains in your account.  Add this to the withdrawal tax rules on Roth IRA Contributions, and this type of account cannot be beat.

Where to make Roth IRA Contributions

These days the best place to set up and maintain Roth IRAs is online at any major broker.  All major brokers (Scottrade, Merrill Edge, ETrade, Zecco, TradeKing) offer online services where you can easily see updated details about your account.  When you log into your account you should be able to see past Roth IRA Contributions that you have made, the money that you have made through your account, and the fees you have paid to keep your account active(this varies between brokers, so if you haven’t set up an account yet, do your due diligence).

If you have any questions on your Roth IRA Contributions please leave a comment below.

More information about Roth IRA Contribution Limits on the homepage.

Roth IRA Contribution Limits 2011

As with every other year the Traditional and Roth IRA contribution limits are set by looking at 3 main factors: Age, Familial Status, and Taxable Income**.  The Roth IRA Rules 2011 article will give you a brief overview of why these matter.

**Please note that your taxable income (sometimes referred to as your modified adjusted gross income) can be found using your 1040A tax form, which takes into account deductions and expenses

Roth IRA Contribution Limits 2011 – Maximum Contribution

Please note that in each section, this is the absolute maximum you can contribute, but the actual maximum may be less depending on the other 2 factors; the chart at the end will help you combine all the factors to determine your true Roth IRA maximum contribution.

Another important property of your maximum contribution limits is that this is the maximum limit combined for both your Traditional and Roth IRAs if you have both.  So if your maximum contribution is $6,000, you can only contribute a total of $6,000 between the two IRAs.

Finally, no matter what your contribution limit is, your contribution must come from your taxable income.  So even if your limit is $6,000, if you only made $3,000 during the year you can only contribute up to $3,000.

Roth IRA Contribution Limits 2011 Factor 1 : Age

There are two main categories for age that you can fall into, for your Roth IRA contribution limits in 2011, these are: Under 50, Over 50.

Under 50: If you are under 50, you are slightly more limited as to how much you can contribute.  Your Roth IRA Maximum Contribution is $5,000.00.

Over 50: If you are over 50, you are given an extra cushion so that you can ‘catch-up’ if needed.  Your Roth IRA Maximum Contribution is $6,000.00.

Roth IRA Contribution Limits 2011 Factor 2 : Taxable Income

Your Taxable income affects your Roth IRA contribution eligibility depending on what bracket you fall into.

Under $107,000: If you fall into this bracket you can contribute the maximum depending on your familial status.

In-between $107,000 – $122,000: If you make this amount, you will only be able to contribute a reduced amount.

Over $122,000: You will not be able to contribute to your Roth IRA; at this point you should look into other types of retirement plans.

Roth IRA Contribution Limits 2011 Factor 3 : Familial Status

There are 3(4) ways you can file as which affect your maximum contribution limits.

Single or Head of Household:  There are no restrictions based on your familial status, your maximum Roth IRA contribution will be decided by the other 2 factors.

Married filing jointly:  If you file this way, you will need to add your 2 taxable incomes together.  Once you have done this your Roth IRA maximum contribution amount will be decided based on your combined taxable income in the following manner:

Under $169,000: Maximum contribution allowed

In-between $169,000 – $179,000: Reduced contribution

Over $179,000: No Contribution Allowed

Married filing separately: If you file separately, it will depend on one crucial factor, which is whether or not you have lived with your spouse at all during the year.  If you did not live with each other during the year, you are treated the same as a ‘single’.  If you did live with your spouse sometime during the year the following restrictions apply:

$0: Maximum contribution allowed

In-between $0 – $10,000: Reduced contribution

Over $10,000: No Contribution Allowed

As far as the reduced contribution amounts go, this article would be extremely long to cover all the specific cases, if you have a specific question please leave a comment below and I will get back to you with an answer.  Otherwise, please continue your query using the IRS Publication 590.

Roth IRA Contribution Limits 2011 Table Summary

**Note the ( ) bracketed amounts of taxable income are for joint filings. [ ] brackets indicate income when married filing separately (If you never lived together refer to the Single row)

Reminder: Your Roth IRA maximum contribution is $5,000 if under 50, $6,000 if over 50.

Roth IRA Contribution Limits 2011 Summary

This is all the information you need to know about the Roth IRA contribution limits 2011, with your age, filing status, and modified gross adjusted income, you should be able to determine your maximum contributions; for next years article please refer to our up to date article: Roth IRA Contribution Limits 2012.

If you are looking for current information as of 2011, please refer to our detailed article that will help you determine your Roth IRA contribution limits – 2011.

Roth IRA Contribution Limits 2012

The IRS releases the information pertaining to the 2012 Roth IRA contribution limits, but these updates can be confusing to many people because of the high amount of bureaucratic jargon. However, as soon as they are released we will update this article with detailed information about what the new contribution limits are and how you are affected by them in clear concise steps.

Roth IRA Contribution Limits 2012 Update

As of: January 1st 2012 The IRS has announced official changes for 2012 Roth IRA Contribution Limits.  The changes announced were in regards to the income limits in 2012, below they are summarized:

• If a married couples’ joint MAGI is below $173,000 in 2012 there are no restrictions to their contributions.  If the MAGI is between $173,000 and $183,000 they can contribute a reduced amount, and finally if it is over $183,000 no contributions are allowed
• There are also changes for people filing as single or head of household, where both the lower and upper bounds have been increased from 2011.  In 2012, the cut-off is $125,000 where you are no longer allowed to contribute if your MAGI is larger than that, and there are no restrictions if you make less than $110,000.  In-between this amount and you can only contribute a reduced amounts.
• For someone filing married but separated, the limits have not changed, if you make any more than $10,000 you are not allowed to contribute to your Roth IRA.

These are the official Roth IRA Contribution Limits 2012 at this point, it is very unlikely that any more changes will occur, but if they do they will be updated on this page. For more information about your Roth IRA contribution limits visit our homepage.

The IRS has now released the official 2013 Roth IRA contribution limits.  All the information on this page is up to date and accurate as of now.  If you are looking for your contribution limits for the tax year of 2012, please visit our page on the Roth IRA contributions limits of 2012.

Roth IRA Contribution Limits 2013

I always advice everyone to read up on Publication 590 that the IRS updates every year, as this is where they will officially publish the updates in the new year for everything regarding your Roth IRA (Not updated until 2013).  However, it isn’t really well organized or explained in certain areas, which is why I update these posts so you can get the information you want without all the bureaucratic jargon.

If you are over 50 years old you can contribute at the maximum of $6,500 in 2013, and up to $5,500 if you are under 50; see below to find out if you can contribute the maximum or not.

Show Me the Numbers!

Below is the summary of the 2013 Roth IRA Contribution limits, there is one bullet point attributed to each tax filing status: married and filing jointly, single/head of household, and married but separated.

• If you are married and filing jointly, the limits have gone up once again in 2013.  The lower limit is now $178,000, and the upper limit is now $188,000.  If your Joint MAGI is under the lower limit you can contribute the maximum, but if you are over the upper limit you can’t contribute at all.

• For anyone filing single, your income limits have also risen.  The lower limit is now $112,000, so if your MAGI is less than that you can contribute the maximum.  If you are over the maximum limit of $127,000 you cannot contribute, but if you are between these numbers you can still contribute, but a reduced amount.

• Finally, if you are married but separated the limits have stayed the same.  If your MAGI is over $10,000 you are prohibited from depositing any money, and if you make less than this you can only contribute a reduced amount.

This post will be updated immediately after any updates from the IRS are released, so make sure to bookmark it and check back near the end of the year to get the latest information on your Roth IRA contribution limits 2013.

Roth IRA Contribution Rules Affecting Your Limits

The first thing you need to learn about are the rules that affect how much you are able to contribute each year.  There are 3 main factors that the IRS uses to determine this level: Age, Tax filing status, and Modified Adjusted Gross Income (MAGI).

Your age will determine your maximum contribution limit, which as of 2011 is $5,000 if you are under 50 and $6,000 if you are over 50.  The reason for this extra cushion is so people can ‘catch-up’ if needed during the last period of their career to set themselves up securely for retirement.

Depending on whether you file as Single, Married- jointly, or Married-separated, there are different income brackets that will determine your contribution levels.  The worst filing status from an owner’s perspective is married but separated.  It is here that your maximum contribution is almost always limited, if allowed at all.  Please note however, that if you have not lived together at all for the year your essentially considered ‘single’ for the purposes of your contribution.

If you would like more detail on how to determine your exact Roth IRA Contribution Limits – 2011, please visit our other articles.  Similarly, our page: Roth IRA Contribution Limits 2012 will always be up-to-date.

Rules For Contributions to IRAs

Trad vs Roth

It is also important to make note of the IRA contribution rules when you have more than one type of account.  You are allowed to contribute to more than one account, but this limit cannot exceed your maximum contribution.  For example, if your maximum contribution is $6,000, you could contribute $3,000 to both your Traditional IRA and your Roth IRA, but if you put $6,000 in your Roth IRA you would not be able to contribute to your traditional account.

When and Where to Make Contributions

Finally you need to know when and where to make your Roth IRA Contributions.  You MUST make your contributions before the tax deadline of the following year, which is usually in mid-April.  For example, in most states this year the deadline is April 17, 2012.

In regards to where to make your contributions, please read the following article, about Roth IRA contributions, which will explain where you can set-up and how to manage your account.  In most cases it’s as simple as signing onto a website and doing some online banking.

If you would like the rules that are relevant to 2011, please refer to our article about Roth IRA rules 2011.