A Roth IRA (Individual Retirement Account) is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA's principal difference from most other tax advantaged retirement plans is that, rather than granting a tax break for money placed into the plan, the tax break is granted on the money withdrawn from the plan during retirement.
A Roth IRA can be an individual retirement account containing investments in securities, usually common stocks and bonds, often through mutual funds (although other investments, including derivatives, notes, certificates of deposit, and real estate are possible). A Roth IRA can also be an individual retirement annuity, which is an annuity contract or an endowment contract purchased from a life insurance company. As with all IRAs, the Internal Revenue Service mandates specific eligibility and filing status requirements. A Roth IRA's main advantages are its tax structure and the additional flexibility that this tax structure provides. Also, there are fewer restrictions on the investments that can be made in the plan than many other tax advantaged plans, and this adds somewhat to the popularity, though the investment options available depends on the trustee (or the place where the plan is established).
The total contributions allowed per year to all IRAs is the lesser of one's taxable compensation (which is not the same as adjusted gross income) and the limit amounts as seen below (this total may be split up between any number of traditional and Roth IRAs. In the case of a married couple, each spouse may contribute the amount listed):
|Age 49 and Below||Age 50 and Above|
For example, if one is single, aged 49 or under, and earns $10,000, one can contribute a maximum of $5,000 in 2008. However, if one is single and earns $2,000, one can contribute only a maximum of $2,000 in 2008 ($2,000 is the lesser of $2,000 and $5,000).
* Since 2009, contribution limits have been assessed for potential increases based on inflation, though the contribution limits for 2009 through 2012 remained unchanged. Nor will the funds divide.
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—Philip Roth (b. 1933)