The Roth individual retirement arrangement was named after its chief legislative supporter, U.S. Senator William Roth. Just like the other types of IRA accounts the Roth individual retirement account is an Individual Retirement Arrangement, but the rules regarding taxation are different. By setting aside money in individual retirement accounts, Americans are eligible to certain tax benefits. Individual retirement accounts can be set up by employers or by individuals. The money in your Roth individual retirement account can be invested in several different things, including mutual funds and stocks. With the other forms of individual retirement accounts – Traditional IRA, Rollover IRA, Conduit IRA, SEP IRA and Simple IRA – the deposited money is not taxed before being deposited. The funds are instead taxed when the money is lifted some time in the future when the IRA account holder retires. With a Roth individual retirement account, your Roth IRA contribution to your Roth IRA account will be taxed before you deposit them in your Roth IRA account, but you can withdraw the money tax-free from the Roth IRA account in the future. Just as with the other types of IRA accounts, you will not pay tax on the accumulating values in your Roth IRA account. The Roth IRA has been created to benefit people in low tax brackets since they will not pay a high tax on the deposited money.
Compared to other types of IRA account, your Roth IRA account will be subjected to fewer restrictions when it comes to withdrawing your money. You can, for instance, be eligible for an early withdrawal of up to $10,000 from your Roth IRA account when you purchase a first home. This means that you can do Roth IRA contributions and still be able to reach your money in advance if you really need them. Another advantage of a Roth IRA account compared to other IRA accounts is that there is no forced distribution based on your age when you have a Roth IRA account.
Just like all the other forms of IRA contributions, your Roth IRA contribution is limited by certain eligibility and filing status requirements that are decided by the U.S. Internal Revenue Service. These requirements are stricter for Roth IRA accounts than for many other types of IRA accounts. You will only be eligible for a Roth IRA account if your income is under a certain level that constitutes the Roth IRA limit. The Roth IRA limit is adjusted regularly to remain updated. According to the latest regulations, the Roth IRA limit varies between $10,000 and $160,000 depending on your life situation. If you are married and you and your spouse are filing jointly the Roth IRA limits are $150,000 and $160,000. When you have earned more than the lower number you are no longer allowed to contribute the maximum annual Roth IRA contribution, and when you have reached the upper number you will not be allowed to do any Roth IRA contribution at all for that year. If you are single or Head of Household the Roth IRA limits will be lower; $95,000 and $110,000. The same Roth IRA limits apply if you are married but not living with your spouse and filing separately. These Roth IRA limits will not apply if you are married and filing separately but did live with you spouse at any time during the year. If you live with your spouse or lived with you spouse at any time during the year, and you are filing separately you will only be allowed to do a Roth IRA contribution if your income is very low. The Roth IRA limits for this situation are $0 and $10,000.
The Roth IRA limit for contributions will also be affected by your age. When you are 50 years or older the maximum annual Roth IRA contribution will be higher than for those who are up to 49 years old. During recent years – between 2002 and 2004 – the annual Roth IRA limit for Roth IRA contributions was set to $3,000 for those aged 49 and below and $3,500 for those aged 50 and above. In 2005, the Roth IRA limits for Roth IRA contributions rose to $4,000 and $4,500. During 2006 and 2007 the Roth IRA limits for Roth IRA contributions will stay the same for the younger group, while the Roth IRA limits for Roth IRA contributions will be raised to $5,000 for those aged 50 and above. One year later, both age groups will experience a higher Roth IRA limit for Roth IRA contributions; $5,000 for the young and $6,000 for the older. The Roth IRA limits for Roth IRA contributions are scheduled to return to the old 2001 levels after 2010, but several observers argue that future legislation will probably keep increasing the Roth IRA limits for Roth IRA contributions to encourage individual retirement arrangements.