Your Money_ The Missing Manual - J. D. Roth [145]
You make investments in an IRA through an individual retirement account. Many folks use the term "IRA" interchangeably to refer to both individual retirement arrangements and individual retirement accounts, but there are some important differences. You have just one Roth IRA, for example, but you can have many Roth IRA accounts. That is, you can have a Roth IRA account at your credit union and one with your mutual fund company, but they're both part of the same IRA. (It's kind of like how this page and the last one are both part of the same book.)
One important thing to realize is that an IRA isn't itself an investment—it's a place to put investments. When you open an IRA account, it's like an empty bucket just waiting to be filled. The things you put into your IRA bucket are investments. You might, for example, buy stocks to put into your bucket, or maybe bonds. Some people use their IRA accounts to buy investment real estate, and some simply let their cash sit there, earning interest in CDs, just as it would if it were deposited in the bank down the street (which may actually be where they keep their IRA account!).
As you might expect after reading the last chapter, smart people mix up the contents of their IRA accounts over time. Their buckets might contain a combination of stocks, mutual funds, bonds, and real estate. (When you start out, your bucket will probably hold just a single investment, and that's fine.)
For many people, Roth IRAs are the perfect place to put retirement savings. They're an easy way to contribute to your financial future, and they're such a good deal that it's worth taking an extended look at them.
Note
Some companies offer Roth 401(k)s, which are like a cross between a Roth IRA and a regular 401(k): You put in after-tax dollars so that you can withdraw them tax-free. You can learn more about Roth 401(k)s at http://tinyurl.com/yh-401k.
Roth IRA rules and requirements
There are some restrictions on who can contribute to Roth IRAs. These arrangements are designed to help ordinary working folks to save for retirement by giving them a significant tax break. They're not meant for people with really high incomes.
If your tax filing status is single and you earn more than $105,000 but less than $120,000 in 2010, the amount you can contribute is limited. And if you earn more than $120,000, you can't contribute to a Roth IRA at all. If you're married and filing jointly, your contributions are limited if your household income is more than $167,000 but less than $177,000 in 2010. And if you and your spouse earn more than $177,000, you can't contribute to a Roth IRA at all.
These income limits are based on your modified adjusted gross income. (If you don't know what that is, don't worry about it unless you think you're close to the limit.) Also note that the Roth IRA income limits usually increase every year. A few other important facts:
If you're younger than 50, you can only contribute $5,000 to your Roth IRA in 2010 (if you're 50 or older, you can contribute up to $6,000).
Tip
These contribution limits increase from time to time to keep up with inflation, so you should check every year to see whether they've gone up.
To invest in a Roth IRA in any given year, you (or your spouse) need to have earned income; in other words, you can't fund a Roth IRA if all of the money you received that year came from an inheritance.
You can use a Roth IRA even if you have a 401(k) or other retirement plan.
You have to make your contributions by the tax deadline each year. For example, you have until April 15, 2011 to make your Roth IRA contributions for 2010. (But it's a good idea to fund your account as early as possible.)
You can convert traditional IRAs to Roth IRAs. There used to be income limits on these conversions, but those limits are gone as of 2010. If you think you might like to convert