Saturday, January 14, 2012

Building Blocks of a Roth IRA

Maybe you've been thinking about supplementing your 401k or 403b retirement accounts. Or maybe you're a student or person with relatively low earnings. Or maybe you just want to get started on your retirement. You might be looking at a Roth IRA. Here are some basic facts to get you started.

  • You must earn approximately less than $169,000 household income to contribute to a Roth IRA. Or less than $173,000 in 2012 (which starts after April 2011) for married fairly jointly (or less than $122,000 in 2012 if filing single).
  • You can contribute $5,000 a year (or $6,000 if you will be over 50 by the end of the year).
  • You must earn in the same year at least as much income as you are contributing.
  • Contributions are made with earned income (or compensation in general) dollars after tax.
  • Qualified distributions are taken without paying taxes.
  • Qualified distributions can be made after you turn 59.5 years old, if you become disabled, or up to $10,000 for certain qualifying down payments of a first home.
  • If you don't meet any of the above requirements for a qualified distribution, and remove money from the Roth IRA that has been in the account less than 5 years you may have to pay a 10% tax on that withdrawal.
  • Exceptions to the 10% penalty tax include paying medical insurance premiums after losing your job, your distribution is less than your qualifying higher education expenses for the year, your you have significant medical debts.
  • You can withdraw contributions in the same year you made them. It is treated (tax-wise) as if you never made them.
  • Distributions must be taken when you turn 70.5.
Hope these facts helped you learn a little more about the Roth IRA. For the full description and details of a Roth IRA you can check out IRS Publication 590

Most major brokerages will let you open a Roth IRA with them. Often you can do everything you need to do over the internet and open the account the same day or within a few days. So if you decide a Roth IRA is the right kind of account for your retirement, I hope you will open one up and start saving! It's never too early or too late.

(Photo from Steven Depelo)

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