An IRA or Individual Retirement Account is an investing device used by many individuals to plan ahead for retirement. An IRA is a common investment vehicle because it is often offered by employers. The Roth IRA is slightly different, and so are the Roth IRA rules.
The Roth IRA was established as a means through which small investors could allow their money to grow over time, and at the same time not be overly taxed when they are ready to take it out. Unlike the traditional IRA, a Roth IRA takes out taxes every time you put money in, rather than when you take your money out. The advantage of this is that you are putting in less money then you are taking out in the end. Therefore, under a Roth IRA, less of your money is eaten away by taxes.
What are the rules of a Roth IRA? As of 2010, single tax filers or those who are married but filing separately can make up to $105,000 a year and still make the maximum contribution. Also as of 2010, the maximum amount an individual can put into a Roth IRA in one year is $5,000, unless you are over the age of 50, in which case you are allowed $6,000 a year. The special provision put in for those over 50 is called the “catch-up” contribution. The catch up contribution is in place to allow those who may not have fully planned for retirement to catch up.
You are not allowed to withdraw any funds from your Roth IRA until the age of 59 and a half years without paying a penalty. These accounts are suppose to be used for retirement purposes, and thus the penalty for early withdraw can be rather stiff. Typically a 10% tax is attached to any early withdraws, however the IRS allows for some exceptions. Some of these exceptions include if you are disabled or if you are using the money to fund higher education. Always remember to investigate your personal financial situation before throwing your money into a Roth IRA, because the money can be hard to get out without paying penalties. You should always also check government websites to get the latest facts and figures about Roth IRA’s since they are updated every year.
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