Roth IRAs are a popular investment for retirement savings. Below are the answers to some commonly-asked questions about them:
What is a Roth IRA? A Roth IRA is a personal (not joint) retirement account that lets you benefit from tax-free interest growth providing you meet certain conditions. A Roth IRA is not an investment "product" per se but is more like a "basket" that people put investment products into. Many people like mutual funds because of the instant diversification they provide, but you can also invest in individual stocks, bonds, CDs, or whatever other investment vehicles are available through the financial institution you're opening a Roth IRA with.
Why is it called a Roth IRA? Roth IRAs were named after Senator William Roth (from Delaware) who spearheaded the effort to create them.
Who can contribute? You can make deposits to a Roth IRA if you have earned income. In 2004 you can contribute up to $3,000 (or the amount of your earned income, whichever is less). In 2005, the maximum contribution amount increases to $4,000. With the Roth IRA, you have until April 15th of each year to contribute. In other words, you can open a Roth IRA and contribute for 2004 as long as it's done prior to April 15, 2005. If you're over 50, you can contribute an additional $500 as a "catch-up" contribution.
What if you don't have $3,000 to contribute each year? That's ok! Simply contribute what you can, subject to the minimum deposit amounts required by your plan custodian (e.g., bank or mutual fund). There's nothing wrong with only contributing $500 or $1,000 to a Roth IRA if that's all you're able to do. Any savings are better than no savings.
What if you're married and in a situation where you don't have earned income? That's ok also. As long as your spouse has earned income, you can still contribute to a Roth IRA for yourself! In this case, your spouse would have to have adequate earned income to "cover" you. For example, if a married worker earns $6,000 in a year, legally, $3,000 could be contributed to each individual's IRA because there was the equivalent of $3,000 worth of earned income for each spouse.
Are there income restrictions on Roth IRAs? Yes - if you are single, your income must be less than $95,000 (MAGI - modified adjusted gross income) in order to be eligible to fund the $3,000 maximum amount. Income above that results in reduced contributions until the income exceeds $110,000 MAGI - at that point, the person is no longer eligible to contribute. The phase-out range for Roth IRAs for married couples filing jointly is up to $150,000 (for a full contribution) to $160,000 (above which, no Roth IRA contribution is allowed).
Where can people go to start a Roth IRA? You can go to just about any financial institution (e.g., banks, insurance companies, etc.). Many investors choose no-load mutual fund companies that offer a variety of options with low fees. Most mutual fund companies require a minimum investment to start a Roth IRA, typically between $500 and $2,500. Some companies allow an investor to start an IRA account with less money than is required for a non-IRA account.
Where can people learn more about Roth IRAs? A helpful Web site that includes links to IRA financial calculators is www.rothira.com. Another is Rutgers Cooperative Extension's Investing For Your Future home study course at www.investing.rutgers.edu. Unit 7, "Tax-Deferred Investments," includes information about Roth IRAs and Units 4-6 discuss various investment products that can be used to fund a Roth IRA.