Should I Open a Roth IRA?
A Roth IRA (Individual Retirement Account) is a type of retirement savings plan that enables you to save for retirement on an after-tax basis. A Roth IRA, which can help to supplement the dollars you are accumulating in your employer-sponsored retirement plan, is different from a “traditional IRA” (sometimes referred to as simply an “IRA”). A traditional IRA is also a retirement savings plan, but it has different tax implications and participation guidelines.
For more information on Roth conversions, refer to Roth IRA Conversions.
Limitations and DeadlinesThe maximum amount you can contribute to a Roth IRA and traditional IRA combined, is $5,000 or your taxable compensation for the year—whichever is less. You may contribute up to $6,000 if you are 50 or older by December 31 of that tax year.
You can open a Roth IRA and make a contribution for a tax year up until the due date (without extension) of the tax return for that year. Generally, this is the April 15th following the tax year. For example, you can make a Roth IRA contribution for 2011 from January 1, 2011 through April 15, 2012.
Tax Treatment & WithdrawalsYou pay taxes on the money that you contribute to a Roth IRA before you make your contributions. But you’ll pay no federal taxes on your withdrawals (including investment earnings) if you meet certain requirements1. However, any withdrawals you make of conversion dollars within five years of conversion or of your account’s investment earnings before reaching age 59½ may be subject to a 10% federal income tax penalty. (Your own contributions are not subject to this restriction; they may be withdrawn at any time, both tax- and penalty-free.) Unlike a traditional IRA, with a Roth IRA, there are no guidelines that require you to begin taking withdrawals within a certain time frame.
You can set up a Roth IRA at many different financial institutions—such as banks, insurance companies and brokerage firms.