Roth IRA F.A.Q.

Instituted by the 1997 Taxpayer Relief Act, Roth IRAs can afford you many benefits in terms of taxation and planning for the future, either for retirement or for other large expenses such as purchasing a home or paying college tuition.

What is a Roth IRA?

A Roth IRA enables you to save for the future by making contributions with post-tax dollars, upon which any earnings are generated with a tax-deferred status. At retirement, most distributions from a Roth IRA are tax-free. In addition, a Roth IRA can be configured to fund large expenses such as purchasing your first home or paying for college.

Can anyone open a Roth IRA?

No. You must meet certain earned income requirements to open a Roth IRA. As of this year (2005), your individual adjusted gross income must fall under $95,000, or, if you are married, your joint adjusted gross income must be less than $150,000, to open a Roth IRA. In such cases you are permitted to make a contribution up to $4,000 or 100 percent of your income in a one-year period, whichever is less. If you are single and your adjusted gross income is between $95,000 and $110,000, you can make a partial contribution; likewise, a partial contribution can be made if you are married and your joint adjusted gross income is between $150,000 and $160,000. If you are 50 or older, you can make an additional contribution of $500, often referred to as a "catch-up contribution." If you exceed these income maximums, you are not eligible to contribute to a Roth IRA.

Are Roth IRA contributions tax deductible?

No. No contributions to a Roth IRA are tax deductible.

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How are my Roth IRA distributions taxed?

Since contributions made to Roth IRAs consist of post-tax dollars, withdrawals of the funds and earnings are tax- and penalty-free if the funds have been held in a Roth IRA for five or more years and if one of the following four restrictions is met:

1. Your age exceeds 59.5
2. You use the funds to purchase your first home (with a lifetime limit of $10,000)
3. You have a registered disability
4. Your Roth IRA funds are being distributed among your beneficiaries after your death

If you are under the age of 59.5, you must pay regular income taxes on any withdrawals, but no penalty will be assessed if one of the following situations applies to you:

1. You use the funds to pay for college or other higher education expenses
2. You use the funds to pay for medical expenses that add up to more than 7.5 percent of your adjusted gross income
3. You use the funds to purchase health insurance after 12 weeks of receiving unemployment benefits.

Income taxes and a 10 percent penalty fee are due upon any withdrawals made outside of the above requirements.