Roth IRA Rules (in Plain English)

A Roth IRA is not an investment. Rather, it’s a type of investment account, in which you can invest in any number of different things (stocks, bonds, mutual funds, etc.).

What’s unique about a Roth IRA is that you are not taxed on the interest, dividends, or capital gains in the account. Provided that you meet a few requirements (discussed below), everything that comes out of a Roth IRA is tax-free.

Note: This is in contrast to a traditional IRA. With a traditional IRA (if you meet certain requirements) you receive a deduction when you put money in, but everything is taxable as income when it comes out.

• Related resource:  Tax Diversification Roth IRA vs. Traditional IRA.

Opening a Roth IRA

There are numerous brokerage firms with which you could open a Roth IRA. For the most part, where you open an IRA won’t have much impact on what investments you have access to. As a result, I’d suggest focusing on low costs and good customer service.

Related resources:

• Discount Broker IRA Comparison
• TradeKing IRA Review
• Scottrade IRA Review
• ETrade IRA Review
• Vanguard IRA Review
• Schwab IRA Review

Roth IRA Contribution and Income Limits

For 2010, the maximum contribution to a Roth IRA is $5,000 ($6,000 if you’re age 50 or over). However, your eligibility to make a maximum contribution depends upon your income:

• If you’re single, you can make a full contribution to a Roth IRA if your 2010 Modified Adjusted Gross Income is less than $106,000.
• If you’re married filing jointly, you can make a full contribution to a Roth IRA if your 2010 Modified Adjusted Gross Income is less than $167,000.

Roth IRA Conversions

A Roth IRA conversion occurs when you take money out of a traditional IRA (or other tax-deferred IRA, such as a SEP) and move it to a Roth IRA. Depending upon a few factors, such as how you expect your tax bracket in retirement to compare to your current tax bracket, this move may save you a good deal of money.

Related resources:

• 2010 Roth Conversion Rules
• Should I Convert my Traditional IRA to a Roth IRA?

Taking Money Out of a Roth IRA

With the exception of amounts converted from a traditional IRA, contributions to a Roth can be withdrawn free from tax and penalty at any time. To avoid penalty and tax on withdrawals of earnings, you’ll have to jump through a few hoops.

Related resources:

• Roth IRA Withdrawal Rules
• Tax Planning in Retirement

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