Roth IRA, named after Senator William Roth who introduced it as part of the Taxpayer Relief Act in 1997, is an individual retirement account (IRA) which allows qualified withdrawals on a tax free basis. A Roth IRA is funded with after-tax dollars but contribution is not tax-deductible.
- A Roth IRA is a retirement account where contributor pay taxes on money going into the account. The future withdrawals from the Roth IRA are tax-free.
- A Roth IRA is best for contributor who think that his/her taxes will be higher in retirement.
- If the contributor make too much money, he/she can not contribute to a Roth IRA. The income limit for singles are $140,000 and the income limit married couples are $208,000. IRS Publication 590-A provides a worksheet to figure out MAGI and the allowable contribution amounts.
- Contributions to a Roth IRA can be made up until tax filing day of the following year.
- Only earned income, includes wages, salaries, bonuses, commissions, tips and self-employment net earnings, can be contributed to a Roth IRA.
- The maximum contribution for 2021 is $6,000. For contributor who is age 52 and above, the maximum contribution is $7,000.
- No age limit for making Roth IRA contributions.
- A contributor can withdraw contributions tax-free at any time and for any reason from a Roth IRA.
- A Roth IRA account holder can maintain the account indefinitely and no required distributions during his/her lifetime.
In summary, Roth IRAs offer many of the advantages of regular IRAs but with more flexibility. Roth IRAs, which provide the opportunity to create tax-free savings account, are best for people who likely to need tax relief later on.
Check out the IRS website for Publication 590-A as shown below.