Series 24: Roth IRAs

Roth IRAs

The primary difference between a Roth IRA and a Traditional IRA is that an individual cannot deduct contributions to their Roth IRAs from their taxes. In other words, the contributions are made with after-tax dollars. The big advantage of a Roth IRA is that participants do not have to pay annual taxes on the earnings made in the account and for many participants both the earnings and the contributions can be withdrawn tax-free.

Earnings can be withdrawn tax free if the money has been in the Roth IRA for at least five years, AND the taxpayer is 59½ years or older. Earnings that do not meet these requirements will be subject to penalty and taxation.

The following rules hold for Roth IRAs:

• • For taxation, one cannot deduct contributions to a Roth IRA from income.
• • Contributions are limited to earned income.