ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Roth IRA 101

Updated on February 27, 2012

What is an IRA?

IRA stands for Individual Retirement Account, and is really just a label placed on an account that allows you to save for retirement. The government provides for special tax incentives on the money that you’re willing to save under the label “IRA”.

Roth IRA 101

Funding: Contributions to a Roth IRA are made with “after-tax” dollars. Simply put, you fund a Roth IRA using your paycheck or bank savings/checking account.

Funding Limits: Unfortunately, not everyone is eligible to contribute to a Roth IRA. The below table lists the funding limits for the year 2012.

Filing Status
Income
Contribution Limit
Single, or Married filing separately
$110,000 or less
$5,000*
 
$110,000 to $125,000
phase-out range
 
$125,000 or more
not eligible to contribute
Married, filing jointly
$173,000 or less
$5,000*
 
$173,000 to $183,000
phase-out range
 
$183,000 or more
not eligible to contribute

* if you are age 50 or older, you can contribute $6000

Withdrawals:

1) Contributions can be withdrawn at any time, tax-free, as long as the Roth IRA has been open for a minimum of 5 years. For example, if you contribute $5,000 and it grows to $8,000 in 7 years, you can withdraw your original $5,000 tax-free, and penalty-free.

2) Earnings/gains on contributions can be withdrawn tax-free after age 59 ½ . Prior to age 59 ½, earnings/gains are subject to a 10% premature withdrawal penalty. This penalty can be avoided if the withdrawn funds are used for certain qualifying reasons: (e.g. higher education expenses, first-time home purchase, disability, medical expenses)

Advantages:

1) Contributions can be withdrawn tax-free, and penalty-free (see Withdrawals #1 above). This is not the case with contributions to a Traditional IRA.

2) Withdrawals after 59 ½ are tax-free (unlike a Traditional IRA, where withdrawals are taxed as income).

3) Roth IRAs are not subject to Minimum Required Distributions. Traditional IRAs require distributions after 70 ½, per IRS rule.

Disadvantages:

1) Contributions are not tax-deductible, like they typically are with a Traditional IRA.

2) Tax-laws are subject to Congressional change, and while the benefits are applicable now, they may be different in the future.

Summary

In general, a Roth IRA is a VERY valuable retirement savings vehicle. Because you can access your contributions after your Roth has been opened for 5 years, and can still enjoy tax-free withdrawals after age 59 ½, it is one of the most flexible ways to save for your future.

This hub is intended to cover the basics of a Roth IRA. There are some not-so-common features of Roth IRAs that may be applicable to your situation, so it’s always recommended to consult your financial advisor. Or feel free to post questions in the comments section, and I’ll be happy to answer.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)