by ward

Created on: May 20, 2008

It is vitally important for the private American investor to familiarize themselves with the annual changes to ROTH IRA rules in order to both maximize their investment income and avoid penalties. First, though, let's review what you are putting your money into when you contribute to a Roth IRA.

BACKGROUND

The individual retirement account, or IRA, is a tax-sheltered retirement plan and was originally created in 1974 to assist individuals not covered by company pensions. Under the U.S. tax law of 1981, IRA provisions were liberalized to allow individuals to contribute up to $2,000 per year (up from $1,500) to such accounts, and the coverage was extended to employees already in corporate pension programs. These contributions are deductible from federal income tax payments. IRA monies may be placed in high-yield investments, with taxation deferred until money is withdrawn after retirement.

In 1998, Congress instituted the Roth IRA. Named after Congressman William Victor Roth, Jr., the Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. As an individual retirement plan, it differs from traditional IRAs in that contributions are not deductible. The earnings are tax-free, but there are no tax-deduction benefits for the contributions made each year. Contributions can be made to your Roth IRA after you reach age 70 and you can leave amounts in your Roth IRA as long as you leave.

You are not required to take distributions from your Roth IRA at any particular age. The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.

If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning distribution date. Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary.

If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. Distributions from

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