What is a Roth IRA and is it right for you?

Right Roth IRAA Roth

Individual retirement account (Roth IRA), just like a traditional IRA, is an investment tool for retirement savings. A

Roth IRA

shares some similarities with a traditional IRA, but differs in other ways, particularly in how the account is taxed. In contrast to a traditional IRA, contributions to a Roth IRA are not tax-deductible and do not reduce a taxpayer's adjusted gross income. Qualified Roth IRA retirement distributions, however, are free of federal income tax and are not included in the taxpayer's gross income.

A

Roth IRA

has the same contribution limits as a traditional IRA, including the special "catch up" contributions for investors nearing retirement. In 2010, you may be eligible to make IRA contributions up to $5000. ($6000 if you are age 50 or older.)

Holders of Roth IRAs, as opposed to holders of traditional IRAs, can contribute to their accounts after age 70½ if they have earned income. Additionally, the holder of a Roth IRA is not required to take mandatory distributions beginning at age 70½.

Roth IRAs are different in regards to withdrawals as well. As long as two conditions are met, withdrawals of contributions (not earnings) may take place at any time for any reason. These withdrawals are tax free and not subject to a traditional IRA's 10% federal income tax penalty as long as the account has been in place for at least five years and the Roth IRA holder is age59½ or older.If withdrawals are taken prior to age 59½, or if the account has been in place fewer than five years, the withdrawal is subject to a 10% federal income tax penalty. There are exceptions to this 10% penalty, however, based on death, disability, medical expenses in excess of 7.5 % of adjusted gross income, qualified first home expenses (up to a $10,000 lifetime limit) or expenses used to fund higher education.

It is important to note that eligibility to contribute to a Roth IRA phases out at certain income limits and that even though qualified Roth IRA distributions are free of federal income tax, they may be subject to state and/or local

Income taxes

A

Roth IRA

Can be a valuable part of your retirement plan, with significant

Tax benefits

For some investors. A professional financial advisor can help you decide whether a Roth IRA is the right choice for your retirement needs.

This article is not intended to be tax or legal advice, and the information in it may not be relied on for the purpose of avoiding federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.