Introduction to the Roth IRA - Rules for Making Roth IRA Contributions, Qualifying Incomes, Contribution Limits, FAQs

(August 22nd, 2009)

Introduction

A Roth IRA is an Individual Retirement Account named after its government pioneer, the late Senator William Roth of Delaware and established by the Taxpayer Relief Act of 1997. A Roth IRA offers participants to invest in a diverse set of securities including common stocks, mutual funds in US and emerging international markets, derivatives, future/options and more safe investment havens such as certificates of deposit, guaranteed deposit certificates and real estate. A Roth IRA can also be converted to a self-directed IRA for investments in real estate investment trusts, physical real estate and real estate mutual funds/stocks. Here are the set of developments that improved the availability of Roth IRAs to retirement savers over the years:

i) Starting 2005, the minimum required distributions were scraped off for the income limitations on Roth IRA conversions.

ii) Starting 2006, Roth IRA income & contribution limits are indexed for inflation, meaning they are increased every year at the rate of annual inflation.

iii) Starting 2008, an eligible distribution from a traditional IRA in an employer plan can be converted directly to a Roth IRA without first going to a traditional IRA.

iv) Beginning in 2010, the $100,000 income limit for single filers on Roth IRA conversions will disappear.

The Roth IRA is advancing in such a stage of life and comes at a time when the responsibility of retirement planning & support is being moved from the shoulders of the government and the IRS to the shoulders of individual workers & employees across America. This is due to four factors:

i) People are looking at working beyond the age of 65 as working life spans increase and retirement is delayed.

ii) The aging & retirement of the baby boom generation will have large implications on government social assistance & retirement programs, and this is why the American government is making a move to move this responsibility on to the shoulders of individual baby boomers.

iii) American organizations are in a major move of shifting away from traditional pension plans to plans that pay retirement benefits based on balance of your account, including 401(k) accounts, Roth 401(k) accounts or Roth IRAs.

iv) The American social security is expected to begin collecting less than what it pays out starting 2017, and if the government taxes are not increased, it is estimated the social security system will not be able to pay out full pension benefits starting 2041.