Any person in the United States who earns income can start a Roth IRA, which is a type of Individual Retirement Account that's treated differently from a traditional IRA. Employers cannot offer either a Roth IRA or a traditional IRA; such accounts must be established with a financial institution such as a bank, credit union or brokerage house. Most financial institutions will require a minimum opening deposit to start a Roth IRA, after which continued contributions must be made by the account owner.
A Roth IRA differs significantly from the traditional IRA, which defers income taxes on amounts contributed until they're withdrawn, or “distributed.” All interest earned by a traditional IRA is also taxed when withdrawn, and a significant penalty is imposed on any distributions made before age 59½. Contributions to a Roth IRA are made with “post-tax” funds — that is, there's no tax deduction for money that's contributed to the Roth IRA. However, subsequent distributions of principal can be made tax-free, and, after age 59½, distributions of interest are also tax-free. In comparing the two, it's generally agreed that the younger the worker, the better a Roth IRA will be, while older workers, especially those with substantial traditional IRAs, are better with the traditional IRA.
Income plays a role both when you start a Roth IRA and in making continued contributions. Single individuals with a Modified Adjusted Gross Income (MAGI) of up to $106,000 US Dollars (USD) may make the full annual contribution to a Roth IRA, and married couples with MAGI of up to $167,000 USD can each make the full contribution. There are limited provisions for reduced Roth IRA contributions when MAGI exceeds these limits. If you have a Roth IRA and your income exceeds the maximum in a subsequent year, it only affects your eligibility to make a contribution for that year.
You cannot make contributions to your Roth IRA in excess of your earned income, with the single exception that a spouse without earned income can start a Roth IRA subject to the same limitations as the working spouse. That means that you cannot start a Roth IRA if your only source of funds is investments, for instance. The income used to qualify for a Roth IRA must derive from salaries or wages or other earned income as defined by the Internal Revenue Service (IRS). The annual cap on contributions to a Roth IRA is $5,000 USD, and workers age 50 and older are permitted to contribute an additional $1,000 USD annually, provided that the actual amount contributed cannot exceed your taxable income.
Like a traditional IRA, a Roth IRA cannot be offered by an employer, but only by a financial institution like a bank, credit union or brokerage, or by another institution that's been certified by the Internal Revenue Service (IRS) as a custodian of Roth IRA funds. Most will require a minimum opening deposit, although some impose no such restrictions. You may wish to start a Roth IRA with a lump sum representing your entire annual contribution — many people do this immediately before filing their income tax returns in April. On the other hand, you may prefer to make periodic contributions to build your account balance. Some employers will help out by deducting Roth IRA contributions from your salary and forwarding them directly to your Roth IRA custodian; in other cases, you'll have to make other arrangements.
The IRS permits Roth IRA funds to be invested in a number of different products, such as traditional securities like stocks and bonds, annuities, and even real estate. The Roth IRA custodian, though, may establish its own rules, and might only permit investments in traditional securities and banking products like certificates of deposit. Thus, if you want to start a Roth IRA that invests some of its assets in real estate or other non-traditional asset, you should make certain that the custodian will permit that type of investment.
Many workers establish their Roth IRAs by converting an existing IRA. If this is your plan, keep in mind that there are significant tax issues involved, because all the money in a traditional IRA has been sheltered from taxes. If those funds are converted to a Roth IRA, it may be necessary to transfer a significant portion of those funds to the IRS. Professional advice should be obtained from a disinterested financial professional before taking such a potentially costly step, which is generally not recommended for older workers with already substantial IRA accounts.
