Roth IRA Explained

In 1997, Congress passed into law legislation referred to as the Taxpayer Relief Act. One of the outcomes of this act was the establishment of a retirement plan called the Roth Individual Retirement Account (IRA). The Roth IRA was named after the legislator that sponsored the bill, Senator William Roth of Delaware. This retirement plan provided the opportunity for individuals and married couples to save money for retirement with a distinct tax advantage.

The primary tax advantage of the Roth IRA is that money deposited into the account is taxed prior to the deposit. As a result, when money is withdrawn from the account during retirement, no taxes are paid on the withdrawals. This is even true for the interest that has accrued over the life of the account. The money in these types of accounts grows tax-free as long as it remains in the IRA account.

Eligibility and Restrictions

This type of IRA account does have eligibility limitations and restrictions regarding maximum contributions. These limitations and restrictions are primarily connected to the modified adjusted gross income (MAGI) of the individual or married couple desiring to contribute. For instance, a single tax filer that earned less than $105,000 can contribute up to the maximum amount allowed by law. A married couple filing jointly that earned less than $167,000 can contribute up to the maximum as well. These maximum allowable contribution amounts will vary based on the age of the participant(s).

Furthermore, those single filers earning between $105,000 and $120,000 as well as married joint filers earning between $167,000 and $177,000 may have lower maximum contribution amounts than those with lesser annual earnings. Individuals earning more than $120,000 and couples earning more than $177,000 may not be allowed to make any contributions to their IRA account.

When Can I Withdraw Money

There are several rules that govern withdrawal of the money invested in a Roth IRA of which you should be aware. Disbursements of IRA funds are made at retirement age, which is 59.5 years old according to IRA rules. Disbursement may also be made as the result of disability. Withdrawals for the purpose of purchasing an individual's first home can qualify for a tax and penalty free disbursement. Money may also be withdrawn from the account at any time if you are willing to pay a 10% penalty as well as the taxes on interest that has accrued.

A Roth Individual Retirement Account is an exceptional savings plan for anyone that would like to set aside money for retirement years. The money in this type of account accrues tax-free interest. Any withdrawals made according to established guidelines will also be free of income tax. Discover Bank has multiple opportunities for you to invest in a Roth Individual Retirement Account. Individuals or couples considering an IRA account that have additional questions or concerns should contact a financial representative at a qualified lending institution.