Contribution to Roth IRA

FinanceTax

  • Author Frank Vanderlugt
  • Published October 19, 2007
  • Word count 462

The need to plan for post retirement life is being widely recognized these days all over the world. A number of plans and accounts are available from banks and financial institutions, both public and private sector. Apart from these in the developed nation of United States, the government itself has supported the Individual Retirement Accounts (IRA) for people looking for retirement security as well as investment benefits.

There are many types of IRA in the country of the United States. The Roth IRA is one such type allowed under the nation’s tax laws. This type of IRA obtained its name from its legislative sponsor, the U.S. Senator, William Roth Jr of Delaware.

The Roth IRA was established in 1988 through a Public Law. The contributions made to Roth IRA can be invested in any security, usually common stock or mutual funds. It is also possible to invest the amount in other avenues such as derivatives, certificates of deposits, real estate etc.

The Internal Revenue Service, the tax regulating authority of the US, has laid down the mandatory eligibility conditions and filing requirements for the Roth IRA. The main significant difference between Roth IRA and other traditional IRAs is its tax structure. Contributions to Roth IRA are made from what is termed as earned income that has been taxed already and is not actually tax deductible. However, withdrawals made from the amount contributed which is the principal amount, is totally tax exempted. Moreover, amount withdrawn from the earnings over the contributions to Roth IRA are in most of the cases, exempted from income tax.

The total amounts that can be contributed to all IRAs including the Roth IRA are limited as shown below:

Year Age of contributor at 49 and below Age above 50

1998-2001 $2000 $2000

2002-2004 $3000 $3500

2005 $4000 $4500

2006-2007 $4000 $5000

2008 $5000 $6000

However from the year 2009 it has been decided to increase the contribution limits by increments of $500 depending on the prevailing rate of inflation. In case of couples, each spouse can contribute up to the limit specified in the above table.

The major advantages of contributions made to Roth IRA are as follows:

· Withdrawal from the contribution is possible any time without tax or penalty payment

· If the Roth IRA owner dies, the spouse is the sole benefactor and can have or combine this IRA as well as his or her own account

· Contributions to the Roth IRA are currently not tax deductible but in future they are taxed at the existing lower rate and not at any future higher rates.

The eligibility for making contributions to Roth IRA is also clearly laid down by the IRS. An individual can make the maximum contribution listed in the above table only if his Modified Adjustable Gross Income is below a certain range. Else only phased-out contributions can be made.

Frank j Vanderlugt owns and operates http://www.ira-information-now.com Ira Information

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